At some point, investors are bound to become frustrated with trends that are "less bad." Eventually, they will demand to see "better," if only to justify the big 38% run-up in stock prices since Mar. 9. Typically, a slower rate of shrinkage in spending, production, and jobs is the first signal of a shift to outright growth. In fact, most of the green shoots of recovery that have spurred investor optimism are just thatâdeclines that are not as bad as the ones before.
The next few months will be a crucial time for these tender sprouts. Economists who are looking for a turn toward at least modest economic growth in the second half argue that production has now fallen so much faster than overall demand that even a stabilization in demand will mean businesses will have to ramp up output in order to replace some of the inventories that were liquidated at a record pace in recent quarters. If the economists are right, that process will add to growth in GDP in the second half, even without much of a contribution from a pickup in spending by consumers and businesses, especially since government outlays from the stimulus package will be providing support.
But that's only the initial stage of the recovery. Stage two may be harderâand that's the one investors are most concerned about. Once inventories are in better alignment with sales, sustainable gains in productionâand thus employmentâwill be increasingly dependent on stronger demand to generate a faster pace of growth that looks and feels like a recovery. And that's the big question mark, given the , poor household finances, uncertainty over profits, businesses' hesitancy to invest more and expand their operations, and the dour outlook for major economies abroad. It's becoming clear that the is nearly over, but will the green shoots then continue to grow and blossom, or will they stop growing and shrivel away?
For now, investors will be happy just to see stage one, and this week's reports will offer some evidence on its progress. Business inventories for April will show if the speed of liquidation is slowing, which would be a good sign for future stabilization in manufacturing. Also, foreign demand, which has become an increasingly important driver of industrial activity, will be on display this week, as April exports and imports set the tone for foreign trade's contribution to growth this quarter. Emerging market economies, which buy about half of all U.S. exports, have shown surprising resilience and should be a plus for U.S. shipments, while weakness here at home limits imports.
Perhaps most important, May retail sales will give an important signal on consumer demand. After showing some strength in January and February, sales relapsed in March and April, declining in both months. Overall grew at a revised 1.5% annual rate in the first quarter, after falling sharply in the second half of last year. However, buying will have to pick up in May and June in order to prevent consumer outlays from dipping back into negative territory in the second quarter. Any renewed drop in consumer spending this quarter is sure to be "less bad" than last year's plunge, but it would certainly not be "better."
Here's the weekly economic calendar, from Action Economics: