America’s economy: The second derivative may be turning positive
Feb 19th 2009 | WASHINGTON, DC
From The Economist print edition
When the going gets tough, the tough get their maths books out
MANY of the diehard optimists on Wall Street have been beaten to a pulp by now, but those still standing have fallen back on a nifty bit of calculus. The second derivative, they say, is turning positive. That means that although the economy is spiralling down, it is doing so more slowly.
There are a few bits of data to back up this assertion. Retail sales rose by 1% in January from December, the first monthly increase since June. Car sales fell in January but were stable to individual buyers, if not to corporate fleets. The economy may shrink at a slightly lower rate in the first quarter than it did in the fourth (in part because fourth-quarter growth is likely to be revised to a steeper drop than the first annualised estimate of 3.8%). An index compiled by JPMorgan Chase finds that although economic news remains on balance worse than expected, the margin of awfulness has shrunk a bit; the firm’s analysts have marginally trimmed the risk of “a mini-depression”.
Meanwhile, thanks to huge policy stimulus by the authorities since October, yields on corporate bonds have edged lower, interbank rates have improved, and the money supply has surged. Thomson Reuters, a data gatherer, says that more than $100 billion of American corporate bonds have been issued this year, more than the four preceding months combined (though many are federally guaranteed).
Larry Hatheway, a strategist at UBS, says a shift in the data from uniformly bad to mixed normally suggests that demand and production are coming back into balance. However, “This isn’t a normal cycle,” he notes. Credit supply has not remotely returned to normal; he points out that investment-grade companies are still borrowing at a punitive 8% even after recent improvements in the market. Though a few junk-bond issuers have tapped the market, part of the demand may have come from funds “gambling for resurrection”, ie, taking a big risk for high yields in a desperate bid to offset losses elsewhere.
For each scrap of good news, there is plenty of the bad stuff. A 16.8% plunge in housing starts in January suggests no bottom is in sight there. Except for Chinese credit (see article), there is little encouraging in the rest of the world. What optimism the markets have shown has been mostly down to hopes of effective policy. This week’s equity rout suggests that policymakers still struggle to meet those expectations.