This week the Commerce Department reported that GDP shrank at an annual rate of 6.1 percent in the first quarter — about the same as in the last quarter of 2008, but much worse than the 4.6 percent economists had expected. While the numbers sounds disastrous — and they’re most certainly not good — details in the report also suggest that the economy may finally be nearing a bottom.
Here are some of the positive signs. Consumer spending rose 2.2 percent in the first quarter, after diving 4.3 percent in the fourth quarter of 2008. Spending on durable goods such as cars and washing machines increased 9.4 percent, while that number had declined 22.1 percent in the previous quarter.
This was good news because consumer spending accounts for more than 60 percent of the economy. As Millian L.B. Mulraine of TD Securities wrote:
[T]here were some obvious glimmers of hope in the report as the improvement in consumer spending (which remains the linchpin of U.S. economic activity) during the quarter suggests that U.S. household spending may be on the rebound.
What does that say about the future? There are a lot of different scenarios about how an economic recovery might unfold, but the leading candidates are:
- A V-shaped recovery featuring a sharp rebound, which after more than a year of recession hardly seems likely.
- A U-shaped recession involving a longer period of stagnation and a slow recovery. That sounds credible.
- An L-shaped recession that leads to many years of economic malaise, much the way Japan suffered in the 1990s. That would be disastrous.
Officials seem to be leaning toward a slow recovery. “We expect the economy to level out in the second half of the year and then begin to recover,” said Christina Romer, head of the White House Council of Economic Advisers. “Whether the recovery begins later this year, as most private forecasters predict, or takes a bit longer is hard to know,” she said.
Why should we be looking at a U-shaped scenario? Consider the following snapshots. The Conference Board’s consumer sentiment index climbed to 39.2 in April, up from 26.9 in March and higher than analysts had expected. At the same time, Eduardo Castro-Wright, head of Wal-Mart’s U.S. stores, said that consumers have taken advantage of low gas prices to buy “discretionary items they were not buying before,” such as sporting goods and bedding. That’s a relatively positive sign.
On the business front, the Federal Reserve Bank of Dallas recently reported that a deep slide in industrial production slowed in April. “Most indicators of future activity continued to improve, suggesting manufacturers expect declines in factory activity to slow further over the next six months,” the survey authors wrote.
Even some of the bad news in the GDP report generated some hope. For example, business inventories decreased by $103 billion, much more than the $26 billion decrease in the fourth quarter. But that could be a sign that companies may soon start placing new orders for goods, generating what one economist called “a nice production snapback.”
None of these indicators unambiguously signal that things are turning around. As Paul Krugman noted on his blog last month, the mere fact that inventories are bottoming out “doesn’t mean the worst is over.” He points to 1931, when a seeming pause in the Great Depression led many people to start breathing easier. “They were wrong,” Krugman wrote.
The Federal Open Market Committee, the Federal Reserve’s policymaking board, likewise released an extremely cautious assessment of the economy this week. “Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions,” the FOMC said, “economic activity is likely to remain weak for a time.”
We probably won’t know for six months or more if they economy has turned a corner. But at least there are some hopeful signs that it’s beginning the process of getting there.
Image via Flickr user jurvetson, CC 2.0
