The recession is over, isn't it ?
The news is now all around: the recession is over. It seems that the media are so hungy for good news, that they forget to give a fair picture of the current state of the US, European and world economy.
US GDP grew by 3,5% in the third quarter. Or to be more precise, a government statistician made an estimate of such growth, taking into account an increasing qualitative judgment on the data. Of this 3,5% , roughly half was because of government stimulus. The cash for clunkers program contributed by some 1,5%. Government expenditures added also a bit.
But anyway. After a terrible stretch of negative growth, there was a quarter of growth in the US economy. To be true, there might even come a new quarter of positive growth and a third. But that doesn't mean the recession is over. A recession is not only measured by GDP. It is a combination of a broad number of economic elements, employment, investments, consumption etc.
But more importantly, we should acknowledge that the current economy is on life support, adrenaline in the form of zero interest rates and ballooning public deficits. This has to be paid back somewhere down the road.
This evening, I met a CEO of an important financial institution. He told me that several companies are in critical danger. Breaches of convenants for instance. A relapse of orders after an inventory-led rebound. Layoffs that are just starting. And delinquencies all around. The picture on top of the post, shows the "seriously delinquent loans" as a % of total (FNM). No explanation needed I guess ? This kind of evolution is bound to have second round effects. Rising unemployment will eventually translate into cuts in consumer expenditures, and probably more delinquencies.
There is one thing we should acknowledge on the positive side: a lot of companies (non-financials) are showing unexpected big profits. To what extent this is currency related (in the US: import of non-USD revenues) or how much is government related is unclear. It is sure however, that companies have been very proactive in cutting costs, and cutting deep.
Corporate profits are at this stage, a support for the markets. The question is also, whether corporate profitability will eventually translate into new investments and employment. In an environment of global excess capacity, I have difficulties in being an optimist on that part of the rosy scenario.