Despite the drumbeat of pessimism that seems just about everywhere, good news can still be found. This morning it was news that German manufacturing orders rose by a surprising 2.8% in April, far more than the 0.4% decline that was expected. Over the past 12 months, orders are up fully 30%. As the chart shows, you might say that German manufacturing orders are experiencing a V-shaped recovery.
That brings up a subject I've wanted to address for some time. What exactly constitutes a V-shaped recovery? Could it simply be a chart that looks something like this one? What about the slope of the right side of the V: how steep does it have to be to qualify as V-shaped?
Here's one proposal that makes sense to me. To begin with, just about every economy in the world suffered a recession of sorts that drove actual output below its long-term trend. According to my calculations, for example, U.S. real GDP appears to be about 10% below its long-term trend (or call it full-employment output). The long-term trend growth rate of our economy is roughly 3%. We won't have a full recovery until real GDP returns to trend, and that will require that real growth exceed 3% a year for some period.
So I'm going to propose that a V-shaped recovery is growth that, if it continues, will eventually restore the economy to its full-employment level of output. In the case of the U.S., that would be annual real GDP growth of more than 3%. If growth is only 3%, then we will be permanently below full employment and the unemployment rate will be forever very high, and the mood of the country will be sour, if not worse. That's what I would call an L-shaped recovery--it's not really a recovery at all.
The chart above would be a good illustration of a V-shaped recovery, since if the current trend in German manufacturing continues, then activity will return to its long term trend in a few years.
The key to whether a recovery is V-shaped lies in whether the slope of the right side of the V is greater than the economy's trend rate of growth. If it is, then it's a V. If it's not, then it's an L.
I do not know the correlation of German GDP to Europe as a whole but I would think that a decent growth rate in that economy would go a long way toward keeping the global recovery going. Periferal economies in Europe will struggle for a long time and restructurings will make for scary headlines. The eternal pessimists will pounce, and given lavish media time, will continue to proclaim doom. However with Europe's largest economy decidedly NOT in recession, at least for the immediate future, the global expansion looks to me set to continue.
ReplyDeleteThis is a little OT for this post, but some of us were worrying about the market over the weekend.
For a long time I have followed Doug Kass from a distance and have been repeatedly impressed with his market savvy. I have often been disappointed when he was (correctly it turns out) bearish as he was in April. He was table pounding bullish in March of '09 and correctly (I believe) called a 'generational low' that month.
Some of you may have caught him on CNBC's Fast Money Halftime program this morning. He is bullish and he is buying. Kass: "An exaggerated lift in risk premia is the source of the month long decline, not material change in fundamentals."
This is decidedly NOT coming from a permabull but from a long/short hedge fund money manager with a terrific history of accurate market calls backed up by big time skin-in-the-game. To me he is one of the highest credibility market pontificators out there, not because he happens to be bullish NOW, but because he so often is not, and is RIGHT.
Incidently, his conclusions dovetail pretty well with what Scott has been blogging all along.
One other aside; he was the only one of the panel to be bullish. He is making the hardest trade, which is to buy. In all my experience, that is what carries the highest probability of being correct.
Just sayin'.
Bloomberg reports that Emirates are ordering an additional 30 Airbus superjumbo airliners '..as demand returns'.
ReplyDeleteThese airliner orders are huge manufacturing projects with many thousands of subcontractors around the world. It adds to Boeing's 787 Dreamliner production increases and bodes well for the global recovery.