Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

May 27, 2009

The Recession Still Has Time to Run but the Stock Market Is Headed North

Tuesday, the Conference Board reported a sharp improvement in consumer confidence—the index scored 54.9 in May, up from 40.8 the prior month. The stock market celebrated with a strong rally.

The Conference Board report was in line with improvements in other measures of household and investor attitudes; however, the hard data on the economy—housing starts and prices, industrial production, private sector employment and new unemployment insurance claims—remains disappointing.

Thursday, the Commerce Department reports durable goods orders for April. These were down 0.8 percent in March, and the consensus forecast calls for another 0.3 percent drop.

Unless the economists are wrong, this key forward looking indicator of economic health would likely indicate that the recession has some time to run. Until consumers have the confidence to purchase big ticket items and businesses put cash into new technology, the economic recovery is not at hand.

Through the end of 2010, the banks will likely foreclose on 2 million more homes—many were financed by prime mortgages, not questionable sub prime loans. That will result in about $100 billion in additional bank and investor losses, or more than twice the $75 billion in new capital the largest banks are required to raise as a result of the Stress Tests. An equal volume of real estate loan related losses is likely too.

The banks can manage this fallout, but consumer spending and private investment face a lot of headwind and will recover more slowly than President Obama and Treasury Secretary Geithner indicate.

Federal stimulus spending will begin gripping in the second half of the year but the recovery is not going to really uncork until the fourth quarter. Typical working Americans will not see marked improvements in their circumstances until next year.

That said, the stock market, smelling a recovery, will head up the second half of the year. It will anticipate the recovery. The June rally is no false spring. 

Prior observation is the last official release figure. For data where the the figure to be released is a revision of a prior preliminary estimate, as is sometimes the case with GDP, productivity or Michigan consumer sentiment, the prior observation is the preliminary release figure; where no official preliminary figure has been released, the prior observation is the release figure for the previous period.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.