Thursday, October 15, 2009

What the Model “T” Says About the Economic Recovery

Tim, one of my fellow job seekers, told me last week he had found a new job. However, I could tell by his stoic expression and lack of enthusiasm in his voice that there was a catch. “They are going to make me an offer when things pick up”, he explained. Then he asked, “Don, when are things going to pick up?”

The truthful answer is I don’t know and if fact, no one knows. It is so difficult to forecast anything in the current economic situation. These conditions have not existed previously, or at least not since the 1930’s, and economic models and indicators may not be very accurate as a result.

For example, every month the Wall Street Journal surveys 50 of the top economists in the country and publishes their forecasts for the major economic indicators. There is a wide disparity in opinions about how the economy will perform in Q1, 2010 (the start of which is a mere 77 days away). The most optimistic forecast is for 5% growth, the most pessimistic is -1.0%. So you have a huge six percentage point difference in GDP predictions. Barring a major event, it is virtually certain that the real number will be between these two extremes. The average of all the respondents for Q1, 2010 is 2.6%. The average of the high and low forecasts is 2.0%. A forecast of 2% is as legitimate as the rest of them and so simple even a caveman (who knows some math) can do it.

The optimistic economists are predicting a “V”-shaped recovery, with the economy snapping back after the sharp downturn. This has happened in the past, but doubters say the continued weak financial system will prevent this from occurring this time. Many economists are forecasting a “U”-shaped recovery, with the economy treading water for a period, before gaining strength. The pessimistic economists forecast an “L” pattern, with the economy very weak for a long period of time. There is much talk about a “W” shaped recovery; with at least one quarter of negative GDP occurring after a recovery has begun. It is significant to note that not one economist in the WSJ survey is predicting a “W” type recovery.

The general consensus is the recovery will be very gradual. Because it is starting at a low level, the recovery will take more time to gain momentum.

The reasons behind the slower recovery forecast are:

▶ Continued high unemployment
▶ Increase in the savings rate
▶ Continued weak housing market and declining commercial real estate market
▶ Credit markets remain tight

Because economic recoveries are traditionally started by increases in consumer spending and a growing housing market, you can understand why the National Association of Business Economists is predicting a “slow and painful” recovery.

What does the Model “T” say about the economic recovery? Although the model is designed to predict movements in the stock market and not the economy, when certain forward looking components of the model are graphed, it forms he pattern shown below.

Definitely not a “V”. Somewhere between the “U” and the “L”, so maybe call it the “UL” recovery pattern. The Model “T” cannot predict timing since several of the components tend to lag economic recovery.

A gradual recovery has begun, hopefully strong enough to get Tim his job offer soon.

Disclaimer Statement:

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

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