U.S. recession easing but no bottom yet

WASHINGTON Tue Mar 31, 2009 5:50pm EDT

Traders work on the floor of the New York Stock Exchange March 30, 2009. REUTERS/Shannon Stapleton

Traders work on the floor of the New York Stock Exchange March 30, 2009.

Credit: Reuters/Shannon Stapleton

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WASHINGTON (Reuters) - The U.S. recession may be easing, but the economy has not hit bottom yet and mounting unemployment looks likely to keep demand sluggish for a while.

A slew of recent data -- including stronger-than-expected reports on orders for big-ticket manufactured goods, housing and retail sales -- has led many economists to declare that the worst of the 15-month, housing-led recession is over.

While the economy still appears on a downward path, the slope is not as steep as many had feared.

"We have seen in the last few weeks enough meaningful indicators that show the economic contraction has slowed," said Bernard Baumohl, chief global economist the Economic Outlook Group in Princeton, New Jersey.

"The odds have increased markedly that we are approaching an inflection point in the economic cycle and that the worst of the recession is behind us," he said. "We're now probably months away from bottoming out."

The economy plummeted at a 6.3 percent annual pace in the fourth quarter, and many economists were expecting a similarly sized drop in the first three months of this year. But the relatively upbeat data has led them to trim those forecasts.

SOME "GREEN SHOOTS"

Sales of both previously-owned and new home sales rebounded in February. Still, the recovery was from historically low levels, making it hard for some analysts to look at the figures as a harbinger of a turn in the economy.

"We can see some green shoots out there in the economy, but that's not enough at this point to tell me definitively that we are close to bottoming out in this process," said Robert Dye senior economist at PNC Financial Services in Pittsburgh.

"There remain significant down drafts in the economy. The linkage between falling home prices, weak consumer confidence, squeezed corporate profits and deteriorating labor markets remains very much in place."

Housing is at the center of the worst economic and financial meltdown in decades, and stabilizing the sector is critical to reversing the economy's fortunes.

The collapse in asset prices, combined with falling incomes on the back of escalating job losses, have curtailed consumers' ability to spend. Household net worth plunged by $11.2 trillion in 2008, according to Federal Reserve data.

CONSUMERS SHOWING SOME LIFE

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, tanked in both the third and fourth quarters of last year. But there are indications it may finally be inching up. Retail sales surged in January and fell only slightly in February.

"We are not there yet, but there are increasing signs there could be a turn in the business cycle in the summer or fall of this year. We need more than a month or two before we can get confident about it," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

"If home sales are putting in a bottom here, it could be the case that home prices also bottom this year, which would mean that as we move into 2010, the financial crisis is really very much behind us."

While orders for long-lasting U.S. manufactured goods rose in February for the first time in seven months, a weak global economy could keep pressure on U.S. producers for some time.

"We are not going to see any support in terms of trading partners for quite sometime and the loss of export markets remains a significant drag on the manufacturing sector," said PNC Financial Services' Dye.

"I don't think we are going to see a true bottoming out process until mid-summer. We should see that reflecting in third quarter GDP results."

Even with the consumer showing signs of life, incomes are falling and unemployment is rising as companies facing profit pressures aggressively cut payrolls to contain costs. This will keep demand subdued for a while, analysts said.

The unemployment rate hit a 25-year-high of 8.1 percent in February and the weekly count of initial filings for state unemployment benefits is holding above 650,000.

"Claims tend to peak about two to three months before the recession ends. Claims have been making new highs, we have not seen them start pulling from their recent high and if that happens we can be confident that we are a few months away from the of the recession," said MKM Partners' Darda.

While the government's $787 billion fiscal stimulus and aggressive steps by the Federal Reserve to pump money into the economy to restore growth should gain traction later this year, many analysts looks for only a tepid recovery.

"We are in the final stage of recession, one that will probably bottom out the next two quarters. A recovery is foreseen in the second half of the year, but growth will be so sluggish that most Americans will not make the distinction,' said the Economic Outlook Group's Baumohl.

(Reporting by Lucia Mutikani)

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