Recession may be over early

The jobless rate is expected to tick up later this week and continue climbing for months, a crisis in commercial real estate looms and the latest survey of bank lending suggests that it’s still pretty hard to get a new mortgage.

So it may sound surprising that some forecasters see an imminent end to the recession.

“The rate of decline in the second and third quarter, if indeed we have a decline, is going to be much more slight than what we’ve seen in the last couple of quarters,” said Peter Kretzmer, an economist with Bank of America in New York. He thinks the economy is beginning to turn.

In a May 1 commentary, forecaster RDQ Economics was more direct. The weekly forecast headline asked, “Is the Recession Drawing to a Close?”

The answer, according to RDQ’s chief economist, John Ryding, is yes. He thinks the liquidation of inventories by business was as large as any seen in past recessions. This emptying of warehouses and showrooms points to future spending by businesses to restock shelves for an expected rise in consumption.

“Inventories sliced 2.8 percentage points off growth in the first quarter, but if inventory liquidation has peaked, then this drag on growth will disappear in the second quarter,” Ryding wrote.

RDQ is advancing its earlier forecast that the recession will end late this year. One reason is that the Institute for Supply Management’s manufacturing index has risen four consecutive months and is nearing levels that point to an economic expansion. Similar manufacturing indexes in China show the same kind of signals. That suggests that the world’s two engines for economic growth are picking up steam.

As the global economy returns to growth, that’s good news for U.S. exports, which kept the U.S. economy out of recession for much of 2007 and prevented the current downturn from being even worse last year.

“A few indicators suggest … that the decline in foreign economic activity may also be moderating. And, as has been the case in the United States, investor sentiment and the functioning of financial markets abroad have improved somewhat,” Federal Reserve Chairman Ben Bernanke said Tuesday.

Testifying before the Joint Economic Committee of Congress, Bernanke said the global downturn was moderating and that he expects a return to growth late this year.

Some private forecasters think the recession’s end may come even sooner.

“The data suggest that the recession may end sooner than our forecast of a fourth-quarter bottom in economic activity,” wrote Ryding, who cautioned it will hardly be the start of a new boom. “Even if the recession finishes earlier than we were expecting, we still expect a very anemic recovery over the next year and the unemployment rate is likely to continue well into 2010.”

That’s a view shared by Mark Vitner, a senior economist for Wachovia in Charlotte, N.C. He forecasts unemployment to reach as high as 11 percent, but he thinks the recession will draw to a close sometime after September.

“I feel certain that the recession is not yet over, but I think we are moving toward some resolution on it,” he said. “Maybe the recession ends late third quarter, or early fourth quarter. But it is still going to be in the latter part of 2009. We’re not going to wake up tomorrow and find everything is fine again.”

Forecaster Ed Yardeni of Yardeni Research is even more bullish. He now thinks the current contraction will shrink at only a 1.2 percent annual rate in the current quarter, and will rebound to a 5.3 percent annual growth rate in the July-September quarter, followed by a 3.3 percent growth rate in the final quarter of 2009.

The exact beginning and end of a recession is never known at the time. It falls to the independent National Bureau of Economic Research to make an after-the-fact determination based on a wide range of data.

There is now a growing number of signs, however, that the economy may be headed for an upturn. Those signs include:

?The Conference Board’s consumer confidence survey, after posting a slight gain in March, surged in April. This suggests that consumers, who drive more than two-thirds of U.S. economic activity, are getting ready to shop.

?Total U.S. construction spending ticked up 0.3 percent in March, the Commerce Department reported Monday. That was the first gain in six months, fueled by public works projects that offset declines in private spending.

?The National Association of Realtors index of pending home sales rose 3.2 percent in March, the second consecutive month it has risen. This measure reflects sales of existing homes that actually occurred six or eight weeks earlier. As such, it suggests a fragile rebound in home sales.

?The Institute of Supply Management’s nonmanufacturing composite index, a private measure of the services sector, showed a smaller-than-expected contraction in April, a sign that the downturn is slowing and could reverse.

?Wal-Mart Stores Vice Chairman Eduardo Castro-Wright told a late-April conference held by the British bank Barclays that American consumers were beginning to spend again on discretionary items, such as sporting goods and bedding.

?The cost in U.S. dollars for a three-month loan overseas ? called the London interbank offered rate, or Libor ? has come down, which reduces borrowing costs. It has fallen from a high 4.82 percent in September to 0.99 percent on Tuesday, the lowest it’s ever been.

?The Fed’s Senior Loan Officer Opinion Survey on lending practices in April showed that banks are loosening their grip on credit for commercial and industrial loans and commercial real estate. Banks actually tightened their lending for home mortgages in the period, but they saw demand for mortgages and home equity loans increase.

If the recession is indeed drawing to a close, most Americans won’t notice. The unemployment rate is expected to rise Friday beyond its current level of 8.5 percent; most projections put it at least up to 8.9 percent this week and then well beyond in the months ahead. In addition, millions of Americans remain underemployed, working two or more jobs to make ends meet.

Problems in credit markets remain a significant risk. A huge number of commercial mortgages will come due for renewal later this year and during the next two years, and they may be unable to qualify for refinancing. That could layer a commercial mortgage crisis on top of the existing residential mortgage crisis, which brought a collapse in home prices to many parts of the nation.

On Monday, credit rating agency Moody’s Investors Service reviewed the entire range of complex bundles of commercial mortgages that it rates. Moody’s downgraded virtually all of these securities, which had a combined value of almost $53 billion, reflecting concerns that a large number of commercial mortgages will either default or not qualify for refinancing.

It all suggests that even when the recession is over, good times won’t return right away.

“We’re no longer looking into the abyss,” Vitner said. “We can deal with this, we can deal with the cards we have now.”

(c) 2009, McClatchy-Tribune Information Services.