On June 10, 2009, Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, addressed North Carolina’s State Senate Appropriations Committee. In his speech, he indicated that he sees signs that the U.S. economy will pull out of recession this year. Mr. Lacker believes that the consumer sector will bounce back sooner than most experts believe. While unemployment will remain high, he forecasts the end of the recession for housing will occur late this year.
On June 11, 2009, Dennis Lockhart, the President of the Federal Reserve Board of Atlanta, addressing the National Association of Securities Professionals, said that the rate of economic decline is moderating and the economy will likely recover in the second half of the year. He predicted slow to moderate growth in 2010.
Mr. Lacker and Mr. Lockhart are just two of the many experts who now believe that the downward momentum of this recession is easing. A report released by the Federal Reserve indicated that they believe the second quarter growth rate will moderate to between -1% to -3%. This would represent a major easing in the downturn. The last two quarters saw the economy contract by over 6% and 5% respectfully.
Hopeful signs are being seen. The stock market has moved forcefully up from its March 9th lows. Corporate profits came in better than expected. Industrial production has shown some signs of life. Productivity is on the rise. And even the amount of layoffs being announced is going down. Next week, ten major financial institutions have permission to pay back their TARP funds. Two smaller banks plan to do the same, which will bring the total payback of TARP to $70 billion. All this will happen while we have only spent just $40 billion of the $787 billion in Stimulus funds.
In the short term, things are looking better, but many economists are concerned over the longer term. Many worry that inflation might reignite, or that the world’s investors (Chinese) might turn away from U.S. Government bonds causing rates to spike. This year alone, the Federal budget deficit will swell to over $1.84 trillion.
To fund that kind of spending, the Treasury Department will be issuing more bonds than ever before in history. Just this week, the Treasury Department successfully issued over $80 billion in new bonds. So far this year, we have seen rates climb on Treasuries, but the increase appears to be more of a return to normalcy than anything else.
On the inflation front, Bart van Ark, Chief Economist with the Conference Board, believes it will remain stable throughout 2010. One of the reasons for his confidence is the poor labor market, which keeps wages in check. Another is the consumer. Consumers are now saving more than at any time in the last fourteen years. This new trend to save is here to stay. Further, the easy credit that fueled consumer spending has dried up.
Currently, the only sign of inflation is in oil and other commodities. The price rise in these is more indicative of a worldwide feeling that the worst of this global economic recession is behind us. The Federal Reserve will have to keep a keen eye on inflation. The Fed has pumped trillions into the economy to keep us out of a depression. It’s working, but the hard part is knowing when to turn off the spicket. In the meantime, we will continue to look for signs of economic growth.