Recession to end in June?
Posted
Oct 27 2008, 04:40 PM
by
Anthony Mirhaydari
Rating:
Things are looking pretty bleak right now. Two wars, a bear market, rising unemployment, falling home prices and even the cold weather are all weighing on our collective consciousness. Even our popular culture is beginning to reflect this darkening worldview.
Still, like the bedtime stories we read our children, a happy ending awaits. According to historical analysis by Merrill Lynch economist David Rosenberg, next June should mark the end of this painful consumer-led recession.
Here's why.
A normal recession can be expected to last 18 months, according to Rosenberg. Assuming this recession started in January, we arrive at the June 2009 end date. In comparison, a typical post-war recession would last 10 months, which means a recovery would be underway right about now.
Traditionally, economists like to focus on the years following World War II. Besides better quality data, the economy of the post-war period was in many ways structurally different from that of the pre-war years. Roosevelt's New Deal policies altered the way the economy responded to changes in growth, which helped moderate the vagaries of the business cycle.
But, as Rosenberg puts it, "we are witnessing unprecedented stuff happen." Housing starts are at a 17-year low, while the University of Michigan's home-buying conditions index has fallen to a 28-year low. Industrial production is suffering from its worst decline in 34 years. Consumer sentiment is falling at the fastest pace since measurement started in 1952. You get the idea.
The problem is that the two pillars of the last 60 years of economic growth are beginning to crumble: Baby boomer's propensity to indulge in credit, and Wall Street's ability to extend it. Given all this, instead of just looking at the 10 post-1945 business cycles, Rosenberg took stock of the 32 dating back to 1855 -- the year Franklin Pierce was president, and six years before the outbreak of the Civil War.
There are a couple more things you should keep in mind. First, the stock market tends to bottom about four months prior to the end of a recession. By this metric, the stock market should bottom around Valentine's Day. Second, the strongest predictor of recessions ending is when the official referee -- the National Bureau of Economic Research -- makes its recession call. On average, a recession will end within a month of it being recognized.
Disclosure: I don’t own or control shares in any of the companies mentioned. I can be contacted at anthony.mirhaydari@live.com
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