What are they consuming at Barclays Capital? Miracle-Gro?
Last week the firm’s US economics team doubled their Q3 growth forecast for the American economy. Yes, DOUBLED – to 2 per cent, while the Q4 forecast was raised to 3 per cent.
Next up, global auto sales are declared to have “stabilized”, while the tech sector “appears to have bottomed.” From the BarCap Global Economics Weekly:
More evidence has emerged that the global recession is losing force, and our confidence in a return to growth in 2H09 is strengthening.
Now it’s on to the shape of the recovery and the unleashing of “favourable feedback loops.”
Die bears, die!
While we have only ten data points, in the post-war period, the US economy has double-dipped only once during a recovery. That was in 1982, when Fed Chairman Volcker deliberately curbed a nascent recovery in his battle against double-digit inflation. The reason the economy tends to keep growing once it starts is that the recovery unleashes favorable feedback loops among the economy, asset prices, and sentiment. In the current environment, just a hint of recovery has helped capital markets by reducing concerns about downside tail risks.
Many of the economic perma-bears confuse level and growth effects over the business cycle. Model simulations show that when the Fed hikes interest rates sharply, it doesn’t cause a death spiral in the economy; rather, growth turns negative for a while and then starts to rebound as the blow is absorbed. The same is true for a capital markets shock: unless the shock repeats—as with a strong feedback loop—the economy will naturally level off. The death spiral argument makes sense today only if policy makers fail to break the feedback loop.
Lest we get carried away on the upside, the BarCap team do acknowledge that recovery in the near-term will be constrained by the sharp slowing in the growth of real disposable income in the US as the one-time effects of a lower oil price and tax cuts begin to fade.
So look for a “U” or a little “v,” not the big “V.”
But be positive!
While there are only a few signs of “green shoots” in the economy—after all, most indicators continue to point to falling activity—there are plenty of signs of “green roots”— economic activity is nearing the surface…
In other words, the “green shoots” are being nurtured by a combination of massive fiscal fertilizer and monetary liquidity (not to mention inventory irrigation and rays of sun from the capital markets). We are growing increasingly optimistic.
Related links:
Stop the rot! – Long Room