On Friday, 12 September 2008, the Dow Jones Industrial closed at 11,422. That Sunday night, the word was out about Lehman’s bankruptcy. From Monday morning, everything began to collapse everywhere. By Monday, 9 March 2009, the Dow closed at a low of 6,547 — having wiped out almost 43 per cent of its value in 121 trading days.

In the meanwhile, on a bitterly cold but sun drenched day in January 2009, Barrack Obama became the 44th President of the USA. That itself was a cause of hope, especially after years of poor governance under George W. Bush. He then managed to get the US Congress to approve a huge $800 billion bailout package in February 2009. Come March, some commentators started talking of a change in the air. The markets, too, seemed to sniff a change. Between 9 March 2009 and 3 April, the Dow Jones industrial rallied to gain 22.5 per cent. Even Ben Bernanke, the chairman of the US Federal Reserve, said in his first ever TV interview to Scott Pelley of the CBS that the ‘green shoots’ of economic revival were evident in some sectors of the economy.

Are we witnessing the green shoots of an early spring? Is this the beginning of a US turnaround? While I would certainly pray so, I think not. Let me suggest why.

The positive is that, in all likelihood, the financial sector turmoil is a thing of the past. However, the facts regarding the real sectors are not at all encouraging. Let’s begin with home prices, whose value is the basis for financing discretionary consumption spends in the US. As on January 2009 — the month for which the latest data is available — the Case Shiller 20-city index was continuing to move south, and ruled at 29 per cent below the peak levels attained in July 2006. In other words, for a very large number of US homeowners, there just isn’t any slack in their consumption budget — the stuff that creates the demand to bring about a sustained uptick. Moreover, I don’t see home prices flattening out very quickly. Despite promised relief from banks, the number of foreclosures are still far too high. January 2009 saw 274,399 foreclosure filings in the US — a small decrease compared to December, but still the 37th consecutive month with a year-on-year increase. Thanks to additional properties entering the market due to almost 3.5 million foreclosures between January 2008 and January 2009, the chances of home prices firming up quickly seem very remote.

Retails spends continue to fall. The latest data shows that retail sales, including food services, for February 2009 were 8.1 per cent less than a year ago; auto sales were 26 per cent lower; and furniture and home furnishing 10 per cent less. Consumer confidence is still taking a bashing. The Conference Board’s Consumer Confidence Index for March 2009 was at 26 (1985 = 100), compared to 61 in September 2008 — a fall of 57 per cent in six months.

Then there is rising non-farm unemployment. In March 2009, it stood at 8.5 per cent — the highest since November 1983. In the net, some 663,000 people lost their jobs in March 2009; which came on the heels of 651,000 in February and 741,000 in January. In the first quarter of calendar 2009, therefore, over 2 million people were thrown out of work in the US. Add to that another 1.7 million net job losses in October-December 2008, and the number totals a staggering 3.75 million that have been put out of employment since October 2008. States like Michigan — of Detroit fame — have an unemployment rate of 12 per cent. What it means is that approximately one in eight of the non-farm labour force in Michigan is now jobless.

Is all this what the Financial Times has recently christened ‘pessimism porn’? The state were you layer one bad news over the other to see how much more of it can you heap with sadistic glee? Where the mantra of darkness and gloom is determined to snuff out even the slightest ray of hope?

There is no doubt that the US has been making the right policy moves, especially under President Obama. And the G20’s concerted $1.1 trillion bailout, of which $750 billion is earmarked to enhance the International Monetary Fund’s capital will help in turning the tide. All these are the good news. But it no less important to recognise that it is still a long haul for the US, the UK, Europe and Japan. To see green shoots in a bear market rally is like pretending that it is spring in the middle of a long and terribly cold winter.

To be sure, animal spirits will come out of hibernation. For the US, that’s somewhere in mid-2010. Later, perhaps, for the UK, the Euro zone and Japan.


Published: Business World, April 2009