The GDP statistics out today contained extensive revisions to previously-released data, but nothing to suggest that the recession didn't end a month or so ago. As the first chart shows, the speed of decline moderated significantly in the second quarter. As the second chart shows, money velocity (defined as nominal GDP divided by M2) has all but stabilized, dropping only 0.4% in the second quarter. In short, the economy has all but completed its healing process. Money that was hoarded is now slowly being released.
The main drags on the economy over the past several quarters have been 1) weakness in business investment (nonresidential construction and capital spending) and 2) a decline in inventories. Going forward, the economy is going to have strong tailwinds at its back, as inventory reduction slows, net exports continue to improve, and velocity starts to rise. Positive growth in the current quarter is now very likely.
The stock market began to sense all this back in March. Back in early March the market was priced to the expectation that the economy was going to fall off a cliff, with massive bankruptcies, deflation, depression and widespread unemployment sweeping the country and the world. With the economy now having recovered its balance, the market has been forced to reprice for a less dismal outlook.
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ReplyDeleteOver at ZH there is a blurb about a topic you cover frequently, US Household wealth.
ReplyDeleteWhile wealth has risen 30% or so with the recent stock market move, if you overlay household debt, which hasn't budged, US household equity is at disturbingly low levels.
Americans are now pretty much caught in the hamster wheel owing much of their lives to paying off debt whether it be theirs directly or the governments via higher taxes. In the end, someone has to pay.
http://www.zerohedge.com/article/money-sidelines-fallacy
The estimate of household wealth on ZH is off by just a bit--like off by maybe $40 trillion. You should use the Fed's balance sheet data see this.
ReplyDeletehttp://www.federalreserve.gov/releases/Z1/Current/z1r-5.pdf
If I make a rough estimate of the net worth of US households today, I come up with something close to $55 trillion. That represents a decline of about 12% from the peak. That's big, and it's a lot of money, but it's not the end of the world and nowhere near as catastrophic-looking as the number cited in ZH.
I don't follow the discussion about MMFs and equity values. The money in those funds can never really flow into the stock market. But if people desire to reduce their holdings of MMFs and increase their holdings of equities, then equity prices move higher even though MMF balances don't decline by much.
The decline in home equity is troubling, but I think there are plenty of signs out there that the real estate market is finding a bottom.
Best indication I can point to lately is the rise of FedEx stock - now at 67, but 32 just a few months ago. A bellwether for sure.
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