Obama has hailed a glimmer of hope, but good times are a long way off, warns Kristy Dorsey

Published on Saturday 18 April 2009 14:08

I read the Beige Book thoroughly, and I think that they may be putting too much credence into anecdotal evidence

IT ALL depends on the definition of "glimmer", which is described in the Oxford Popular Dictionary as a "faint gleam". Barack Obama might well have spotted a dim glow at the end of the tunnel of financial turmoil, but experts agree it is a long way yet before the US and global economies emerge to greet the dawn of a full recovery.

In what was billed as a major economic speech – despite a lack of any new policy initiatives – the US president said last week that his administration could see a future far brighter than the country's recently troubled past. He outlined his vision of a United States "teeming" with new industry, commerce, energy and discoveries that would "light the world once more".

"There is no doubt that times are still tough," Obama told his audience at Georgetown University in Washington, DC. "By no means are we out of the woods just yet. But from where we stand, for the very first time, we are beginning to see glimmers of hope."

Though tempered with caveats of more financial pain to come, the president's words represented a marked shift from far more pessimistic comments about the state of USA Inc during his previous 84 days in office. The spotlight now burns even more intently upon the ensuing flow of economic data, with every factory floor worker, middle manager and captain of industry looking for signs of renewed vigour to back up their leader's cautious optimism.

So far, the data has thrown up a mixed picture. Though the latest weekly US jobless claims showed an unexpected drop in the number of new applicants for unemployment insurance, the total number collecting these benefits still stands at a record of more than six million people. In the housing sector, confidence among builders questioned in a national survey rose this month to its highest level since October, even though construction on new housing starts dropped by a higher-than-expected 11%.

Meanwhile, the US Federal Reserve has also issued the latest update from its 'Beige Book', which provides an assessment of economic activity based upon anecdotal evidence collected from the Fed's 12 regional banks across the country. Though this concluded that "overall economic activity contracted further or remained weak" during the latest period under review, it also hinted at a moderation in the pace of decline in certain areas, as well as signs that activity in some sectors was stabilising.

Some commentators have seized upon this as a sign that the economic decline is beginning to bottom out. However, others are wary of reading too much between the lines.

"I can see that there is a kind of scanning of information, and anything that can show a potential of hope, people will be drawn to it," says Brian Bethune, US economist at the world-wide headquarters of IHS Global Insight in Lexington, Massachusetts. "We have to be careful not to jump to any conclusions.

"My biggest concern, in particular at the Federal Reserve, is that people inadvertently try to look for something that isn't there. I read the Beige Book thoroughly, and I think they may be putting too much credence into anecdotal evidence."

Bethune believes it will take until September or October before the US moves into any sort of significant growth mode. Referring to the stream of data released in the days after Obama's speech at Georgetown on Tuesday, he noted that while sentiment might be improving, there were still no real signs of increased activity, particularly in the housing sector.

Despite his generally downbeat assessment, the IHS economist is pleased by the shift in tone from the current administration. He believes coverage of the downturn has in some instances been an overly negative caricature of the actual situation. Gloomy statements from Obama and his team in the early part of his presidential tenure were not helpful on this score.

"It is not a freefall," Bethune says. "It is a measured response on the part of the business community to a fall in demand both at home and abroad.

"We are in a recession, and it is going to last for several more months, but the world is not coming to an end."

The US Federal Government has, by some estimates, committed more than $7 trillion towards the problem. Though a significant part of this was stumped up by the previous Bush administration, Obama has been a fierce advocate for attacking the economic crisis on all fronts. This has led to accusations of reckless spending from some – mainly Republican – quarters.

Much of Tuesday's hour-long speech was aimed at deflecting these criticisms and further bolstering public support ahead of tough budgetary wrangling over pricey Obama initiatives such as health care reform and the alternative energy programme.

He said his $787bn (532bn) stimulus package, including financial sector bail-outs, assistance for the mortgage market, and the ongoing restructuring of the US auto industry, had started to "generate signs of economic progress". Anticipating the possibility of "bail-out fatigue" among the public, Obama chose to focus on results, claiming that his recovery plan had stemmed public sector layoffs, bolstered clean energy and construction companies, and assisted homeowners who were re-financing at historically low mortgage rates.

"Our programme to support the market for auto loans and student loans has started to unfreeze this market and securitise more of this lending in the last few weeks," Obama said. "And small businesses are seeing a jump in loan activity for the first time in months."

The US president is attempting to tread a delicate line, as overly optimistic comments would seem out of touch with the reality faced by more than five million Americans who have lost their jobs in just the past five months. Slightly more than six million people are now collecting jobless benefits, which in normal times are only available for the first 26 weeks of unemployment. Many states have tapped into Federal funds to extend this limit.

Such moves reflect the general expectation that any recovery is going to be a more drawn-out affair than the quick bounce out of downturns of recent years. Alan Thompson, economist with Scottish Widows Investment Partnership, expects US GDP to contract by 2.7% this year.

"The US is in a deep recession, and we don't see any great growth in the following year – it will be quite muted," Thompson says. "We expect an expansion of 1.5% in 2010, which is not going to be like a traditional US recovery, not like in 2001, for example, when the economy came out of that recession quite fast."

Further clouding the picture in the wake of Obama's address at Georgetown was the news that US headline inflation has sunk into negative territory for the first time in half a century. Though this set tongues wagging about the possibility of a destructive round of Japanese-style deflation, more measured commentators noted that core inflation, which excludes volatile food and energy prices, remained firmly positive at 1.8%. The 0.4% decline in overall consumer prices during the 12 months to March can be attributed almost entirely to the unwinding of last year's surge in oil prices.

"It is not deflation that keeps economists awake at night, but having said that, we can't sound the all-clear," says Paul Ashworth, senior US economist with Capital Economics in Toronto. He believes any threat from a sustained fall in prices is more likely to materialise in 12 to 24 months, though this is not a foregone conclusion.

More immediately, Ashworth says that although industrial production continues to plummet, this measure of factory output tends to lag behind what has already happened in the economy. Predicting a possible recovery requires examination of leading indicators such as new orders, which did edge up in the US in February.

However, the picture remains extremely mixed. While a few tender green shoots could mean a recovery is on the way, Ashworth and others note that severe recessions of the past have been peppered with false rallies that petered out before the downward trend resumed.

"The rate of recession and the severity of recession has eased off a bit, but I don't think we are seeing any sort of serious recovery," Ashworth says.

"It all depends how you define 'glimmers of hope'. Are things actually going up? No, not yet."