Economy Grows in First Quarter of 2009—But End of Recession Is Not in View: March 2009
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GROSS DOMESTIC PRODUCT (GDP) – total value of goods and services produced in the U.S.
Changes in the Consumer Balance Index (CBI) indicate GDP grew between the fourth quarter of 2008 and the first quarter of 2009, recovering a portion of its 62% decline between the third and fourth quarters of 2008.
Specifically, the CBI gained four points, from 74 in the fourth quarter of 2008 to 78 in the first quarter of 2009, after having declined seven points, from 81 to 74 between the second and third quarters of 2008.
The CBI tracks consumer perception of the balance between their income and assets versus debt and spending. When the pace of economic activity accelerates, the CBI moves up; when economic activity declines, the CBI decreases. As such, the CBI is an indirect, co-incident indicator of economic activity.
It is important to recognize that the CBI describes what has already happened – what is yet to be reported later after the quarter ends by the Bureau of Economic Analysis (BEA).
RECESSION—START TO FINISH
Start of the Recession
Between October and November 2007, the CBI dropped eight points, signaling the possible start of the recession in November.
The National Bureau of Economic Research (NBER) announcement that a recession began in December 2008 was necessarily delayed, in that the NBER defines a recession as a “significant decline in economic activity spreading across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production and wholesale sales.”
Low Point of the Recession—but not necessarily the low point
Roughly a year after the recession began, between September and October 2008, the CBI dropped ten points, signaling an abrupt slowing of economic activity. The Bureau of Economic Analysis (BEA) reported a 6.2% decline in GDP between the third and fourth quarters of 2008, which is consonant with the seven-point decline in the CBI from 81 to 74 between the third and fourth quarters of 2008.
Easing of the Recession
After dropping ten points in October 2008, the CBI ticked up in November and again in December 2008 before rising five points in January 2009. In all, between October 2008 and January 2009, the CBI recovered seven of the 22 points it had lost from pre-recession October 2007 to the low reached in October 2008.
Co-incident and consonant with this “easing” of the recession, the Index of Leading Indicators, while still negative, increased slightly. Existing home sales rose six and a half percent.
Tightening of the Recession in February
Between January and February 2009, the CBI declined three points, from 80 in January to 76 in February, indicating the economy was again tightening. It then edged up to 77 in March.
GDP Rises in First Quarter of 2009
Despite the recession tightening in February 2009, the average CBI for the first quarter of 2009 was up four points, from 74 in the fourth quarter of 2008 to 77 in the first quarter of 2009. As a result, the BEA is likely to report that GDP increased between the fourth quarter of 2008 and the first quarter of 2009.
End of the recession not in view in March 2009
The CBI in March 2009 at 77 is eighteen points below the 95 CBI that obtained in pre-recession October 2007. It does not show any sustained increase in recent months.
ALTERNATIVE VIEWS OF CHANGE IN ECONOMIC ACTIVITY: MARCH 2009
The monthly consumer tracking survey that provides information used to compute the CBI began in 1972 as an effort to predict the end of the recession and then continued as a continuous effort to predict change in economic activity.
The alternative measurements that have been developed and used over the past thirty years to predict change are not as consistently precise in forecasting change as the CBI has been during its nineteen months of operation in identifying change after it has occurred but before it is announced in government reports.
Statistics that have some merit in predicting change provide alternative views of the economy that are useful in interpreting the CBI.
Stock Prices
Stock prices are often a leading indicator of change in economic activity.
Currently, investors are leery about future stock prices and reluctant to buy stock. It is unlikely that stock prices will be supported strongly by investors buying in the event of a sharp decline in stock prices.
The ratio of potential buyers to sellers in the event the Dow drops 10% declined from 1.90 buyers per seller in August to 1.06 buyers per seller in October (when the CBI declined 10 points to a low). It continued low in subsequent months at 0.90 in November, then 0.89, 1.06, and 0.61 in February before edging up to 0.94 in March.
While the ratio of buyers to sellers continues in March to be well below levels seen earlier, the bounce from 0.63 buyers to each seller in February to 0.94 in March is consonant with the 9% increase in stock prices – on relatively low volume – observed during the week ending March 13.
This 9% gain follows the major decline in stock prices to record lows earlier in March.
It is unlikely that the 9% rise in stock prices in early March signals an upturn in the economy. Investors do not display the strong conviction about future stock prices that they evidenced early in the recession, when the ratio of buyers to sellers hit peaks of 2.81 buyers per seller in November 2007 and 2.06 in April 2008 before peaking again at only 1.90 buyers per seller in August.
The economy remains fragile. In the event of bad news, investors are not likely to be inclined to buy into the market and support stock prices.
Consumer Confidence
Slight improvements observed in consumer confidence in March might ease the recession’s grip on the nation slightly.
The percent who believe the economy will get better gains three points, from 45% in February to 48% in March, but remains below the 53% figure achieved in January 2009.
Simultaneously, the percent who expect their own family’s financial situation to improve ticks up a point to 53% in March from 52% in February and January, which is the best level seen since the start of the recession.
Also, the percent who say their current income is less than they need to live comfortably declines from 43% in February to 37% in March, the lowest level seen since the November reading of 23%.
The theory that a surge in consumer confidence predicts a rise in retail sales was developed during the post-World War II economic boom. Incomes rose faster than consumer spending, and consumers were awash with cash.
It is my recollection from having worked in Washington at the time that Rensis Likert at the Bureau of Agricultural Economics took an assignment from the War Production Board to predict consumer demand, so that it could allocate still-scarce materials to industry (notably the auto industry), for which there was urgent consumer demand.
J. Walter Thompson built its advertising business by offering to create advertising that would induce consumers to buy products that they did not know they wanted.
Consumer Spending Intention
While consumer confidence in their own and the nation’s financial situation improves only modestly in March, there are major increases in consumer spending intentions.
The index that tracks consumer willingness to spend freely on food, clothing, gasoline, and medical expenses increases from 70 to 79 between February and March reaching the highest reading since 79 in March 2008.
Simultaneous, the index measuring active shopping – visiting dealers, checking prices – for new cars, housing and eight other major goods increases ten points, from 78 in February to 88 in March, the highest reading since 95 in December 2008.
While consumers shift toward feeling ready to spend, it is uncertain whether the pace of actual sales will increase in step with the robust increases in purchase intentions. The spirit may be willing, but family incomes are weak.
The percent reporting their income increased in the past month ticks down to 12% in March, from 13% in February, and the percent reporting income increases in the past year edges down from 35% in February to 31% in March.
Satisfaction with the President
Public satisfaction with the performance of the President increased sharply with the change of the administration, moving from 26% pleased in January, during Bush’s last days in office, to 50% in February and 56% in March, during Obama’s first months in office.
Roosevelt, Reagan and now Obama, acting on the assumption that fear inhibits consumer spending, try and actually succeed in inspiring consumer confidence – giving consumers the right to dream about better times to come.
While consumer confidence in their President definitely increased in March, as did purchase intentions, the percent of consumers who expect the recession to end within a year remains flat between February and March at just over 6%.
LOOKING AHEAD
The next CBI reading, available in mid-April, will be posted on 8sages.com, to which access is free and registration is not required.
If you have questions, want to comment or desire an advanced copy of the April report, telephone Leo J. Shapiro at 520-878-0188 during Arizona office hours.
Copyright March 2009 by Leo J. Shapiro – All Rights Reserved.