Recession bottoms

While we have seen a surge in the stock market after an analyst upgraded Goldman Sachs, these type of low volume summer moves come and go and will likely reverse either later this week or possibly after earnings. While there are many clear signs that the economy is not going to get significantly worse and, in fact, will start getting better, possibly only in a few sectors at first and possibly slowly, there are still a large number of people pushing negative news.

I read an article titled "Nine reasons the economy is not getting better" that focused on the recent unemployment report and tried to demonstrate that as bad as it was on the surface it was actually much worse. Some of the data was real but there was an awful lot of speculation related to part time workers, trends used by the labor department and the status of people who were unemployed but are no longer collecting unemployment. Now, I don't pretend to know what these people are doing right now, but the author doesn't either and speculated a worst case scenario. Being a worst case scenario, it may have some validity, but, statistically, worst case is normally not very likely.

One point made in the article concerned the fact that unemployment has increased at a record pace during this downturn. He thinks this bodes ill for the economy, but why would that be? Companies reacting quickly and dumping workers, is going to make them profitable much faster than if they reacted slowly.

So what is required for economic recovery? The most obvious answer is businesses that are making money. Profitable businesses will survive and eventually grow. One way to stay profitable during a drop in demand is to become more productive. Companies that fail to react quickly soon go out of business, unless of course the Government bails them out, but economics requires that efficient companies survive and non-efficient ones don't.

It would seem we are now at the point where the companies that are going to survive have reduced costs to the level they need to. Before you can have growth, you have to have some stability. The second step will be some increase in demand.

I should point out that many negative analysts argue along the following lines. Increased demand is being created to replenish inventories and not because consumers are buying more. Therefore, since there isn't top line growth, it isn't a real recovery.

Let's consider this logic. If the economy has reached a point where inventories are depleted and therefore companies have to increase production to replenish it, what does that mean? It means plants that have laid off employees will need to bring at least some of them back or increase the hours and pay of those currently there. Now, this would represent an incremental increase in disposable income and even if savings were to stay at the recent high levels, it would represent an incremental increase in demand. This is the start of a recovery cycle. Because just like on the slope down, each incremental decrease in demand resulted in less employment and less demand, you recover the same way. Will it be an explosive increase? No, it has to build, but it will pick up speed over time.

In addition, we are going into a period where the stimulus package the Government has passed is going to start having more impact. If you add this to the incremental increases in demand, you will suddenly start to see some real growth in consumer spending. If past experience is any measure, by the time the stimulus is fully hitting the economy, it may no longer be needed and may simply start to fuel inflation. I wouldn't predict that since we have some other fundamental issues related to housing and credit, but I wouldn't rule it out either.

Simply put, recoveries always happen, and many times they seem to be a surprise. Pessimistic views will continue and some analysts will talk about false recovery and how we are living in a fool's paradise and eventually we will have another recession, and they will point out how right they were all along.