This Isn't a Recovery

The recession might (or might not) be over, but at least one thing is clear: this isn't a recovery.

Merriam Webster defines a recovery as "the act, process, or an instance of recovering; especially: an economic upturn (as after a depression)" or "the process of combating a disorder (as alcoholism) or a real or perceived problem." Beyond the stock market, we haven't met the first definition, and we certainly haven't met the second. We haven't dealt with any of the root causes of the financial crisis.

In early August, I wrote

there's more retrenchment to come...beyond the painful downsizing we've seen so far... we're only a quarter of the way through the inventory correction. The current Super-Glut... remains more than twice as big as the inventory bloat seen during the 2001 recession.

In late August, I wrote

Government and exports are key. Most of everything else continues to shrink or deteriorate. How far the recovery evolves beyond all this remains to be seen.

What I've seen over the last few weeks hasn't done much to change this appraisal. The gigantic overhang of excess inventories, unused industrial capacity, unsold homes, homes headed for foreclosure and vacant office and retail space remain a big obstacle to real economic growth.

Inventory-sales ratios are still as much as 8% above healthy levels.

More than 30% of the country's manufacturing capacity sits unused.

The commercial real estate market is sliding closer to the abyss, as prices continue to fall, sales volume remains sickly and vacancy rates rise.

As long as the massive Super-Glut persists, we won't see a serious pickup in investment and construction. As long as many businesses remain saddled with this bloat, we won't see a meaningful expansion or pickup in hiring...

...or even work hours.

Exports have been one of the few genuine bright spots over the past few months, but the Baltic Dry Index, a real-time guage of global trade, has shown little sign of more growth ahead since it bottomed earlier this year.

The risk of default (as measured by premiums in the CDS or credit default swap market) has worsened for most of the following 22 major banks tracked by the Bespoke Investment Group.

Saddled by toxic debt, glum on growth prospects or both, banks are still not lending at anywhere near pre-crisis levels. And to the extent banks are lending, businesses and consumers -- also debt heavy and also skeptical about growth prospects -- remain even less willing to borrow.




 
It's the picture of a U.S. consumer still in retreat. A record 7.58 percent of U.S. homeowners with mortgages were more than 30 days late in making their payments last month, up from 7.32 percent in July and the fourth consecutive rise. Despite an improvement in net worth flattered by the stock market rebound, consumers continue to try to reduce debt, extending a record drop in borrowing.

Oil prices, as much a gauge of global economic growth as inflation, are more or less dead in the water aside from the occasional flare-up of tension in the Middle East, which itself represents a significant risk to any real future recovery.

One of the best ways to figure out the future direction of the economy is to track the actions -- not words -- of market participants. Federal Reserve officials have expressed growing optimism about a rebound and have suggested interest rates might rise as a result. But speculators in futures markets aren't betting their own money on rate hikes (or economic growth) any time soon.

Fed funds futures prices on the Chicago Board of Trade suggest that the Fed isn't expected to meaningfully raise short-term interest rates above current near-zero levels until at least a year from now. And it's unclear how much of the slow, small increase expected over the next two years represents expectations for higher inflation rather than growth.

It's also impossible to disentangle the temporary effect of Washington's tax breaks (for housing and clunkers) and easy money policy from the few signs suggesting future growth -- such as the index of leading economic indicators and the upward sloping yield curve.

It's hard to take the recovery talk seriously.

Executives at public companies aren't. Net insider selling is back near levels preceding last year's financial tailspin. Dell took a hard long look at the landscape and decided the future was in government contracts, not in the U.S. private sector -- that explains its decision to buy Perot Systems for a fat premium.

Meanwhile, the U.S. continues its revival of the dead-end, zombie-bank-propping policies of post-80's Japan. Washington is amassing a reputation for fiscal management that looks increasingly like pre-2001 crisis Argentina's or 2009 California's. Recurring proposals from D.C. to raise taxes, expand regulation of the economy and borrow are putting a damper on business hiring and investment.

The big wildcard to the outlook now is how long the U.S. government will be able to continue driving up the nation's debt. America's debt-to-GDP ratio by some measures is already above those recorded during the Second World War. As the Federal Reserve buys up much of that debt by basically printing money, our international creditors are expressing growing unease and (in some cases) alarm over our solvency and the dollar's stability.