Greenshoots or False Spring?

Miss Strawberry with the Winners of the Strawberry Bakeoff

I woke up this morning to a chill in the air.  When I came back home from university today it was a chilly 60 in the house. There’s a frost warning for the North Shore and I had to put the heater back on and pull at the flannels.  I walked the dog in a fleece jacket and had to put socks on.  This weekend was just warm, sunny, and great and the Strawberry Festival was in  full swing?  WTF happened here in Southeastern Louisiana?   One day I’m basking in the first hint of a warm sun enjoying fresh strawberry shortcake and the next I’m hoping that the magnolia blossoms are safe.  Yes, there’s  a Strawberry Queen, a Strawberry Ball, and Strawberry Royalty.  If you gotta work somewhere, it might as well be the Strawberry Capitol of the Word.

So, having been raised in the Great Flyover and spent most of my childhood watching my Dad’s business sell F-150s to the local farmers, I know a lot about a false spring.  That’s when Mother Nature messes with you by giving you just enough spring to think the worst of winter is over and then hits you with the cold blast of reality.  Thankfully, my cold blast didn’t include the blizzard that hit the heartland, but it is a cold blast.  That’s why I’m having so much fun with the economic word-de-jour.  That would be Ben Bernanke’s “green shoots”.   An Ivy-leaguer from South Carolina should know about about false springs.  Bloomberg picks at the analogy too in Bernanke ‘Green Shoots’ May Signal False Spring Amid Job Losses.

April 6 (Bloomberg) — It will be months before it’s clear whether what Federal Reserve Chairman Ben S. Bernanke calls the U.S. economy’s “green shoots” represent the early onset of recovery, or a false spring.

The Labor Department’s April 3 report that the economy shed an additional 663,000 jobs last month, while the unemployment rate rose to 8.5 percent, will be followed by months more of bad-news headlines, economists say. The recession, now in its 17th month, has already cost 5.1 million Americans their jobs, the worst drop in the postwar era; unemployment may hit 9.4 percent this year, according to the median estimate in a Bloomberg News survey, and may top out above 10 percent in 2010.

The risk is that the jobs picture turns even more bleak than forecast or the drumbeat of bad news still to come causes consumers, whose spending has firmed up in recent months, to hunker down again.

“If something happens to spook consumers and they crawl back into their tortoise shells, that would be terrible news,” says Alan Blinder, former Fed vice chairman and now an economics professor at Princeton University.

Consumer spending, which accounts for more than 70 percent of the economy, rose 0.2 percent in February after climbing 1 percent in January, breaking a six-month string of declines.

This question is not unique today.  Not by a long shot.    Here’s Mark Thoma, one of my favorite econ bloggers at the NY Times  with  “The Economy’s ‘Green Shoots,’ Real or Imagined?”.  Thoma teaches at the University of Oregon and blogs at Economist’s View.

There have been a few encouraging signs for the economy lately with improvements in retail sales, orders for manufactured goods, pending home sales, and home construction, though I should note that not all analysts agree that the housing data show improvement once seasonal factors are taken into consideration.

Those signs, coupled with other positive developments such as falling mortgage interest rates, would be very good news if they indicated that the beginning of the recovery is not far away.

However, I don’t think we’ve reached the beginning of the end, and caution is in order, particularly for policymakers. It is not at all unusual for the economy to tick upward temporarily during a slowdown, only to have it return to its previous, stagnating state. So policymakers must consider the possibility that this is nothing more than a temporary blip in the data, and continue to plan and set the stage for further action, if necessary.

Thoma is part of an ongoing debate that also includes Tyler Cowen of George Mason University.  His vote is for sucker rally and false spring also. So, we’re beginning to see votes come in from economists all over the map.

I am not persuaded by recent signs of an incipient economic revival.

First, you can find “suckers’ rallies” and the like in all major downturns. Second, the U.S. economy still has major and indeed worsening problems (see here for some data on just how bad the problems of the world economy are). Job losses are not slowing down and banking and finance remain precarious. Many forms of securitization appear to be a thing of the past, and thus capital will be scarcer and more expensive for the foreseeable future.

It is unlikely that all the international dominoes have fallen, most of all in Eastern Europe and possibly in China as well. (I suspect that Iceland will not be the only country to prove insolvent.) Until this uncertainty is cleared up, an observed recovery is likely short-lived rather than fundamental and permanent.

Third, and most importantly, we are due at some point for a bout of contractionary monetary policy. Mr. Bernanke has turned on almost every possible spigot and over time we can expect broader measures of the money supply to increase dramatically. The planned “quantitative easing” for instance will run in the neighborhood of $1 trillion in new monetary expansion. At some point it will be necessary to reverse these monetary expansions, so as to avoid inflation rates like those of the late 1970s.

Roger Altman says “In a Desert, Anything looks like Growth”.

Our economy has fallen so far and so fast that any sign of bottoming will be interpreted as a “green shoot.” Indeed, when the recent, abysmal rates of job loss slacken even a bit that will be seen as turning the corner. At one level, this is fair. Until we hit bottom, we cannot begin to move up. But, at another level, it is missing the forest for the bark.

That’s because America will fall way short of a cyclically normal recovery. The balance sheet nature of this recession mandates this. In other words, American households and lending institutions have suffered so much financial damage that healthy levels of consumer spending and overall lending are not achievable through 2011. Without them, especially with consumer spending representing 70 percent of G.D.P., a healthy recovery is not possible.

Yes, the stock market has experienced a nice three week rally. But, it remains 45 percent below its mid-2007 high. Glimmers or no glimmers, that’s the real point.

There’s plenty more experts adding their contribution to the Times Blog thread and they’re all worth reading.

Oh, by the way, today for my Macroeconomic Theory class I discussed fiscal stimulus vs. tax cuts and the multiplier effect.  Most of the Festival goers showed some pretty intense signs of Festival overdose.   Well, this weekend they were breathing the fresh air, enjoying the warm sun, and tasting fresh, red juicy ripe strawberries.  This afternoon, every one is running around putting tarps and canvasses on the crops to protect the tender green shoots, small white blossoms,  and tiny little strawberries.

Have a very berry recovery!!!