May 08, 2009 - CAMP Money

LETTERS From CAMP Rehoboth

CAMP Money

Years from now, economists, historians, politicians, and even you and I may look back at April 2009 as the beginning of the end of the nation's worst economic crisis since the Great Depression.

It is certainly too soon to declare an end to the recession, but anecdotal signs of recovery are starting to appear.

As the 44th President reached his notable 100th day in office, the month ended with Wall Street having its best month in nine years. The Dow Jones posted a gain of 7.4% (7.7% in March) and the S&P 500 Index (considered to be the most reliable measure of the broader market) boasted a 9.4% increase, its best performance since March 2000.

For investors, this is more than a relief. It is a potential indicator that perhaps the worst is finally behind us. Generally speaking, the stock market tends to recover sooner than the economy as a whole.

Why are we seeing signs that the economy is improving? The Federal Reserve met on April 28th and announced it sees signs the recession is easing and that the economic outlook has "improved modestly" since March. While consumer spending has shown "signs of stabilizing," it is still being constrained by declining home values, rising unemployment and harder-to-get credit, the Fed said.

At its March meeting, the Fed introduced a $1.2 trillion effort to boost economic activity by pledging $300 billion to purchase government debt over the next six months, with another $850 billion to be used to buy mortgage-backed securities from Fannie Mae and Freddie Mac. These efforts are intended to keep mortgage interest rates low and spur Americans to start spending more.

As a mortgage Loan Officer in Rehoboth Beach, I can certainly attest to the fact that these efforts are seeing their desired results. Personally, my origination volume for the month of April was higher than it has been since 2004. While primarily refinance driven, purchase volume has also started to increase, a small but important sign of improvement.

Before we get too excited, however, even with the gains in March and April, the Dow is still down 42% from its peak in October 2007, and the S&P 500 index is off 44%. Need I mention how many of us are still avoiding our 401K and investment statements?

The problem, and solution, for the economy revolves around lending and spending. Lending is the lifeblood of the economy, and today, credit markets have slowed due to fears that borrowers won't pay back their debts. Without spending, businesses cut back and lay-off workers. Consumers who lose their paycheck shop less, buy used versus new cars, put vacations on hold and eat at home, not in restaurants.

It has been the question on everyone's mind, at every dinner table and water cooler in the country, 'How long will this last?' While an abundance of economic indicators dominate the Wall Street horizon, for the average American, there are a few key indicators to watch:

Jobless Claims

Consumer Spending

Personal Savings Rate

By textbook standards, jobless claims are a timely indicator of the labor market. Announced weekly, they can reveal when a declining economy is nearing an end. Robert Gordon, economics professor at Northwestern University, specializes in tracking recession patterns. Going back to the 1960s, he found that the four-week average of new claims "peaks about a month before the declared end of recessions with remarkable accuracy."

To date, the four-week jobless claims average peaked at 659,500 in the week ending April 4th, and has declined each week of April to 631,000 the last week of the month. While leading economists and the Labor Department aren't near a point of stating a formal 'end' to the nearly 17 month recession, most are willing to acknowledge a slowing in the pace of decline in the economy.

Next, consumer spending constitutes about 70% of the U.S. economy. When consumers spend, the economy grows. Consumer spending rose 2.2% during the first quarter of 2009, after falling 6.3% during the last quarter of 2008, the largest drop in over 25 years.

For the first time in over a decade, the personal savings rate has been over 4.0% for three straight months, coming in at 4.4% in January, 4.2% in February and 4.0% in March.

But after all of the analysis, the answer to the end-of-the recession question could be as simple as a cardboard box. Cargo and cardboard are two heavy-duty industrial signals to watch. The Baltic Dry Index is an assessment of the price of moving raw materials on cargo ships around the world. It reached a 22 year low in December, but has been increasing all year.

Former Federal Reserve Chair Alan Greenspan monitored the cardboard box business as an industrial production indicator. About 75% of all nondurable goods are shipped in cardboard boxes. When demand for boxes increases, it's a sign the economy is also on the rise.

And while the media will certainly let us know that the unemployment rate, which hit a 25 year high of 8.50% in March, is a negative sign of the economy's strength, it is a lagging indicator and really the last main indicator to improve.

As consumers, our confidence in the economy and our willingness to spend again will prove to be the ultimate determining factors. But in order for that confidence to gain, it is also important for each of us to do our homework and form our own conclusions about what is happening in the economic world around us. Just remember, there are many pieces to this puzzle. Read between the lines, and think outside the box!

LETTERS From CAMP Rehoboth, Vol. 19, No. 04 May 08, 2009