Has the U.S. recession bottomed?

Sometimes it's good to take the other side in an argument and see what you get. Since the consensus among economists is that the U.S. recession will last well into the second half of the year, it's interesting to consider whether a recovery has already started.

Now, investors may think it a bit of stretch, given the unknown status of major U.S. banks pending a stress test on their operations and identification of their toxic assets, to make the case that the worst may be over for the U.S. economy. Nevertheless, there is some empirical evidence and case precedent to suggest that the economy may have bottomed already.

In his weekly column, Marketwatch.com's Chief Economist Irwin Kellner submits the empirical evidence, and he makes a fairly compelling argument.

The optimists' case

Kellner cites about 20 metrics, and the ones that offer the most ammunition for the optimists' defense are as follows: 1) The Conference Board's Leading Economic Indicators index has risen for two straight months, 2) Existing Home Sales increased in December 2008 and may also show a rise in January, 3) Real Hourly Earnings rose 4.5% in December 2008 after a 3.3% increase in November 2008, 4) Retail Sales inched up 1% in January, not much, but it was the first monthly rise since June 2008, 5) The Institute for Supply Management's manufacturing index rose last month, 6) The London Interbank Offered Rate (LIBOR) has dropped to 1.2% from about 5% several weeks back, and 7) the corporate bond market is thawing: there was $127 billion in dollar-denominated debt sold in January, the most since May 2008.

The case precedent is more qualitative in nature and it comes from our friends inside the beltway. There is an axiom in Washington that goes, When Congress passes the fiscal stimulus package, that's the bottom of the recession.

The axiom is based on Washington's unusual pace. The theory holds that once a recession starts, it takes Congress about three months to notice it, then another three to six months to negotiate a package that's acceptable to the political parties and other relevant lobbies, and then more time to pass a final fiscal stimulus package. Hence, if the Congressional action barometer is accurate, the U.S. recession bottomed this month, February, as a result of the passage of the $787 billion fiscal stimulus package.

Economic Analysis: Of the two, Kellner's analysis represents the strongest argument for a recession bottom, but don't cast aside that Congressional metric. Moreover, the above evidence demonstrates that those who argue there aren't any signs of a recovery -- that all relevant metrics are bearish -- are wrong: some indicators show signs of new economic life.

That said, investors need to play close attention to two other key metrics: the monthly jobs report (which measures layoffs) and the monthly durable goods orders report (which measures new orders placed with manufacturers for immediate and future delivery). Job layoffs must end and factories must become busier for corporate revenue and earnings to rise. When each metric trends in a growth-positive direction for several months, the U.S. economic recovery will be underway.

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