Posted by: Joe Weber on August 05
Adding to the growing consensus that the recession is ending, economists at the Bank of Montreal’s capital markets unit are suggesting that the slump will hit bottom this quarter. But they, like so many other prognosticators, fear that the recovery will prove tepid and fragile for both the U.S. and Canada, their home base.
“Auto sales have turned up in both countries, with the U.S. advance spurred by a wildly successful incentive program,” BMO Capital Markets chief economist Sal Guatieri says in the Aug. 4 edition of North American Outlook, a bank publication. His headline: “Good-bye Great Recession. Hello So-so Recovery.”
“Home sales have risen for three straight months in the U.S., led by previously hard-hit states like California and Arizona. Home prices have likely bottomed, with the Case-Shiller index posting its first monthly increase in three years. This could unleash a wave of pent-up demand for homes.”
The economist points to a reduced decline in U.S. gross domestic product. He notes that GDP shrank a painful 6.4% in the first three months of this year, but declined just 1% in the second quarter. “An upturn in auto production and sales flags a return to positive growth in Q3,” he says.
He points to gains, too, on the financial front, saying things are as good as they were before Lehman Brothers, the big investment bank, collapsed last fall. “By most measures, financial conditions have improved to pre-Lehman levels. Recovering risk appetites have reduced corporate bond yields to historic norms, with spreads against Treasuries returning to their September 2008 levels,” Guatieri says. “Equity prices in [the U.S. and Canada] have bounced 45% from their March lows, fueled in part by better-than-expected bank earnings. The upturn in equities could restore about half of last year’s decline in household wealth.”
But we’re not out of the woods just yet, he cautions. The “recovery remains tentative, especially in the U.S., where job losses, though slowing, are still large. Not since the 1948-49 recession have total job losses (at nearly 5%) been greater.”
With the high unemployment levels, he cautions, consumer spending is fragile, foreclosure rates still linger at high levels and commercial real estate is in distress. An uptick in hiring – generally the last sign of a recovery – may be the only cure for such challenges.
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.