Tuesday, September 15, 2009

Bernanke: ‘Recession Is Very Likely Over’

Fed head Ben Bernanke declared “the recession is very likely over at this point,” adding the phrase “from a technical perspective.” He said this during a question-and-answer session at the Brookings Institution today.

Well, gee whiz golly.

While Mr. Bernanke’s forecasting prowess is somewhat suspect (we all can say that), he got some strong ammo from a blockbuster retail sales report that was way above Wall Street expectations. Overall retail sales jumped 2.7 percent at an annual rate in August. Take out the cash-for-clunkers temporary car bulge, and sales still jumped 1.1 percent. In GDP terms, core retail sales (excluding autos, gasoline, and building materials) still rose 0.8 percent for August, which comes to 2.7 percent annually over the past three months. This means consumer spending in the third quarter ending in September will rise by more than 2 percent annually.

I wonder if Mr. Bernanke isn’t underestimating the very substantial monetary stimulus that he has injected into the economy, going back about nine months. This is the Milton Friedman monetarist experiment. The Fed’s balance sheet has grown by over $1 trillion; various money-supply measures are running about 10 percent on average; the Treasury yield curve is very steep and positively sloped; and of course the target rate is near zero. Add to that $1,000 gold and a weak dollar.

We’re talking easy money here. It started last fall, and with a roughly six-to-twelve-month lag, it’s now beginning to impact the economy in a significant way.

So Mr. Bernanke may be underestimating a V-shaped recovery that will extend through 2010. And don’t forget that marginal tax rates are going up in 2011. That’s likely to mean -- in supply-side-incentive terms -- that many folks will bring as much income and investment as they can into 2010 to beat the tax hike. And that could add to GDP in a significant way next year.

Another recovery indicator from my pal Mark Perry: The TED spread, which is the three-month LIBOR rate minus the three-month T-bill rate, considered to be an important indicator of credit risk in the economy, has plunged from nearly 500 basis points last October to only 16 basis points currently -- the lowest level in more than five years, going back to June 2004.

In very simple terms, money is easy and plentiful while business profits are rising. It’s a recipe for recovery.

Now let’s hope Team Obama doesn’t take over the whole economy.