Friday, July 31, 2009
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.
Posted by Scott Grannis at 11:04 AM