Has the Economy Turned the Corner?

Last week may have been a pivotal one for the economy. When the Federal Reserve cut its key interest rate, the fed funds rate, on April 30th just a quarter percentage point down to 2% it signaled that a larger rate cut was not needed due to improving conditions in the financial markets. Many in the financial markets had thought just a week before, due to poor economic data, that the Fed might cut rates up to half a percent. Also, on April 30th, the Fed made it clear that it may not need to cut rates again in the future.

So, what’s going on? With the bailout of Bear Stearns (see my blog article titled “Bear Stearns – What’s Going On & Why Is This Important To Know About?, posted Saturday March 15th), as well as the aggressive moves by the Fed in reducing rates seven times since September 2007, providing $400 billion in liquidity (cash and loans) to the markets, etc., etc., the financial markets are responding to these measures and are improving as a result.

Many economists as well as Wall Street watchers are saying that the worst is now behind us. However, what are they basing this optimism upon? First, despite the rash of bad news and reports over the last several weeks (i.e. – reports on the economic calendar such as the existing home sales for the month, durable goods orders, new home sales, jobless claims, consumer sentiment, etc.), the stock market has managed to climb almost 11% in the last few weeks. How can this be? Because, as I mentioned above, Wall Street now believes the worst is behind us. Many now see a broad sustained recovery in both the financial markets and economy for the second half of the year. This is what NAR’s Chief Economist, Lawrence Yun, has been saying all along – please read his articles posted on this blog.

Lately, the stock market has surged because of all the measures taken by the Fed, Treasury, Administration, and Congress that are now beginning to have a positive impact on the financial markets and economy. This is also having an effect upon the dollar, which is beginning to strengthen and, in turn, is causing oil prices to fall. In addition, key volatility indices such as the Market’s North American CDX, as well other indices, show that corporate credit risk has fallen sharply since mid-March. What does this mean? Despite the massive debt write-downs just a month or two ago by corporate giants like Citigroup Inc. and Merrill Lynch & Co., which caused great volatility in the markets, the underlying strength of the financial markets is now firmer than it has been in recent history.

The change in attitude on Wall Street is remarkable to watch compared to the doom and gloom of just a month or two ago. At that time, you may remember that Bear Stearns was tanking due to billions of mortgage-security losses. As I mentioned above, there was a string of negative economic data, which strongly suggested we were nose-diving into a potentially serious recession. In addition, there seemed to be no hope in sight concerning the implosion of the housing market.

However, Wall Street now sees that there are more profitable times ahead even though consumers are currently financially strapped because of inflation, a poor job market, and tightened credit. Wall Street and the Fed also realize that the national housing market is still very fragile and may have a few more bumps in the road before it stabilizes.

Yet, here in New York, NYSAR's March data for sales of existing single family homes is up 10.1% from the month prior, with a foreclosure rate of only 1.9% statewide. Please read the blog article posted herein titled "New York Housing Figures for March Show What’s Really Going On!", posted April 28th, for more information about how well the housing market is doing here in New York.

It remains to be seen in the weeks ahead if Wall Street can sustain the recent gains it has only recently made or if the market will slip once again. Nonetheless, the effects of lower interest rates and the stimulus package will have a broad and sustained positive impact on the economy. As you may recall, the 2008 fiscal stimulus package contains over $100 billion in tax rebates. The rebate checks, as of last week, are beginning to be received in people’s mailboxes (though I haven't received mine yet).

According to Chief Economist Lawrence Yun, the current tax rebate is more than twice as high as a similar rebate passed in 2001. He believes that the marginal propensity to spend from a tax rebate is about 40 cents to 50 cents on the dollar. Based on this, that should translate into additional consumer spending of $60 to $80 billion in the second half of the year. That’s a great shot in the arm for the economy.

How much things will improve remains to be seen. It was just reported last week that the national economy grew at a snail’s pace of just 0.6% in the first three months of this year. It is the second consecutive quarter of feeble growth. Yet, 0.6% is still a positive number at a time when many experts were predicting a negative number.

While many economists have believed that the country has been headed for a recession and the new media, for the most part, has been talking about recession (some have even speculated about a possible or probable depression), it hasn’t happened yet. Actually, it looks like we may be turning the corner.