Economic Downturn Eases, Even As Robust Recovery Eludes

Posted by: Joe Weber on June 15

green_shoots.jpg Signs of an upturn in the economy abound even as immediate recovery seems dubious, analysts for the Boston Consulting Group report. The analysts marshal an impressive array of data that gives one reason to believe the worst is behind us in Collateral Damage Part 7: Green Shoots, False Positives, and What Companies Can Learn from the Great Depression. However, they also caution that even some positive indicators haven’t made the case for a confirmed upturn yet.

The report, released on June 15, suggests the global economy is shrinking at a slower rate than that of six months ago. And the analysts stick by their view that a sluggish recovery is likely early next year. It cautions corporate executives, many persuaded lately to take an optimistic view, that they need simultaneously to prepare for the tough times and for the growth likely beyond them.

Of course, much of this sort of talk echoes the complaint of Harry S Truman. He famously pleaded for a one-handed economist, since his advisers were constantly saying ‘on the other hand.’ And yet, lots of smart executives are indeed expecting better times, while preparing for worse. Paralysis may be the unhealthiest reaction of all.

“Things are clearly better today than they were three months ago,” the BCG analysts say. “As Jean-Claude Trichet, president of the European Central Bank, said, the economy appears to be ‘around the inflection point.’ The free fall of the last few quarters appears to have moderated and we are now experiencing a slower rate of decline. Nonetheless, there are few signs that we are back on a positive trajectory.”

The analysts echo views we at BUSINESS WEEK hold that a case for optimism can be just as compelling as — or, more likely, more on the mark than — the case for gloom. “Today, after seeing the deepest drop in economic activity since the Great Depression, it is just as easy to assume that the slump will continue forever. But such unbridled pessimism would be as wrong as were the assumptions about the prolonged period of growth.”

Conceptually, of course, it’s problematic to argue that a global economy can move sideways in the sense the BCG folks suggest it is now doing. Conditions are either improving overall, or they’re not, it would seem. But it’s also true that many of some 61 separate indicators they looked at don't yet show convincing gains, but only a slowing in deceleration. At best, it seems the evidence is ambiguous – supporting the notion of “green shoots” instead of a confirmed spring.

The BCG researchers -- principally David Rhodes and Daniel Stelter -- pored over data from the United States, Germany, France, the United Kingdom and Japan. They focused on consumption, business output and investment, labor markets, housing and financial asset markets, and monetary policy. They found that fewer than 10% of the indicators were clearly positive, while a quarter showed positive trends but not growth strong enough to confirm an upturn. Almost 60%, they found, suggested a slowing in decline, but no consistent upturn.

Some examples of the positive indicators: The U.S. Purchasing Managers Index registered a fourth consecutive month of growth in April. In May the U.S. Consumer Confidence Index saw its biggest jump in six years. And, in spite of volatility, global stock markets have gained between 30% and 50% since their March lows.

Some negative ones: New orders in manufacturing and new orders in construction are either only showing a decline in the rate of deceleration or are negative. Retail sales have yet to show consistent upward movement and exports remain largely down. Furthermore, falling housing prices continue to reduce consumer net worth and that affects demand.

Unwilling as the researchers are to call the tough times at an end, they do repeatedly refer to signs that suggest an upturn that is either beginning or only a few months off. “It is not all gloom and doom, however,” they say. “When we analyzed the same set of indicators for December 2008, we found that the picture was much worse. Only 11 percent of the indicators had shown any upturn, and a whopping 61 percent of the indicators were still [continuing to decline]. The biggest change since then has been the shift … from a continued ‘free fall’ into what appears to be a slower decline.”

Perhaps the most important takeaway from the report is that no single indicator is the be-all end-all. Many have led in some recessions and lagged behind in others. Certainly, unemployment rates, for instance, tend to climb even as a recovery takes hold. Moreover, even as recession will end, the analysts argue that a sluggish recovery is more likely than the “V-shaped” gains some executives hope for. They argue for a “U-shaped” upturn where declines stop, but strong gains are delayed.

One must wonder about this view, however. The recession came on and raced around the globe with astonishing speed. And much of that was due to a crisis in confidence that swiftly moved from the financial sector to other parts of the economy. As confidence recovers, especially in light of heroic measures by government to shore up the financial sector and to prod bankers to open their wallets to borrowers, might not an aggressive upturn take hold?

Nonetheless, the data the BCG researchers spell out should be must reading for anyone interested in tracking the economy’s performance. Perhaps our readers would like to weigh in on the question? Feel free to join the conversation here.

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About

BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.

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