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According to the stock markets the economic recovery is well on its way. Since the March lows the markets have gained an outstanding 60% in value, a rebound unsurpassed in recent market history. General economic theory states that the markets lead the economy and this has lead to an almost universal feeling that the worst is over for stocks and the economy. However the market rallies have stalled these past few weeks and as the game rolls into the fourth quarter there are some pundits that believe that worst days are still ahead.
The U.S. gross domestic product which is a measure of economic activity is about to be reported at somewhere in the 3% to 5% real gain in the third quarter. This gain follows a decline in the second quarter and 6% declines in last year’s fourth quarter and the first quarter of 2009. The stock market rally seems to be confirming the economic recovery but is all this bullishness cautious optimism or just wishful thinking.
The first three quarters of economic activity this year have been anything but normal. The forces driving the economy during this confirmed recessionary period do not necessarily suggest real economic growth. Many companies having let their inventories dwindle now face the dilemma of ramping up production to restock inventories or letting competitors an open market from which to grab market share. In plain English they must increase their production because the cupboards are bare and there will be nothing on the shelves left to sell.
The “cash for clunkers” program while not producing profitable quarters for North American car manufacturers certainly helped contain the bleeding. The US stimulus package which will likely bankrupt the country or deflate the value of the American currency in the future is likely responsible for the rest of the ‘positive’ news investors have relied upon. Now comes the real test of economic growth in the US economy; will corporations increase investments and more importantly will the debt laden cash strapped consumers who account for 60% of all economic activity start buying.
In recent history when money was cheap and plentiful the consumer responded to economic downturns with an increased appetite for goods and services. As the housing market bubbled and home equity values soared the euphoria of perceived wealth powered the consumer’s appetite to buy. A second mortgage meant the car of your dreams could be bought. A loan against your home equity meant the vacation of your dreams could be had. Borrowing was not a concern because jobs were numerous and jobs were secure in the world’s largest economy, right.
This time there is a major employment problem that leads not only to job loss but also wage contraction. We also have a continuing problem of frozen credit despite the best efforts of Washington. The stimulus program mostly benefitted the banks as they have sucked up all the cash for their own life support, leaving the average citizen to face the harsh reality of seeking financing for a home that is now worth substantially less than it did just six months ago. Also the losses of net worth experienced in real estate values and the stock market crash of last year have not been repaired sufficiently to warrant throwing caution to the wind once again.
So as the ball is handed to the shaky hands of the consumer we will once and for all find out if the recovery is real and on track. If the consumers cannot hold onto ball then the opportunity to move forward will have been fumbled and the economic stimulus instead of having its desired effect will become a debt burden which may ultimately crush the US economy. As the stock markets are forwarding looking a positive performance in this quarter may well confirm the health of this recent rally and the overall economy. Failure to do so may be the signal that this recession is not over and we may just be at the forefront of a more serious problem not seen in over seventy five year, a full blown economic depression.
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