Econowatch

So how about that recovery? You missed it? Too bad, because the last few months might be as good as it gets for a while.

According to our Graph of the Week (see right), compared to other nasty recessions of the past, the S&P 500 has already enjoyed one of the best rebounds ever. The bad news is, that may be all the rebounding you’re going to see for some time. Because if this recession is anything like the previous ones, we’re either just on the cusp of a plunge into the next Great Depression, or (more likely) we’re in for a few years of going sideways, as we did after the oil crisis of 1973 and the tech crunch of 2001-02.

It’s certainly possible that we could embark on a new bull market and pick up where we left off in 2007, but the smart money seems to be on a recovery of the excruciatingly slow variety. Why? As Warren Buffett wrote in the New York Times last week, mainly because “enormous dosages of monetary medicine continue to be administered” by the government, and “before long, we will need to deal with their side effects.” In short, the U.S. has taken on its largest non-wartime deficit since 1920 to get us this far, and it’s still racking up debt at a frightening rate. Eventually that money will need to be paid back, and even the U.S. will be strained by the effort.

As Buffett writes, if the Chinese and other recipients of America’s current account deficit invest every penny in U.S. debt, and Americans themselves save more money than they have in years and invest all of that in U.S. debt too, the U.S. Treasury will still be US$900 billion short. This will put enormous pressure on the President to cut spending and hike taxes, or even worse, crank up those money presses and usher in years of nasty inflation.

Buffett’s analysis, by the way, was the most optimistic of three dissertations on What Comes Next to emerge over the past little while. In the second, Bill Gross, the legendary co-founder of PIMCO, wrote that he thinks the days of five per cent annual increases in American GDP are over, and we may have to get used to three per cent growth instead. This would lead to a “vicious cycle of recession or low-growth stagnation” and a portion of the labour market “will have to be permanently laid off.” The third outlook, by Nouriel Roubini, professional bear and professor of economics at New York University, was so depressing I don’t even want to go into it.

Enjoy the sunshine. It could be a long, cold winter.

GRAPH OF THE WEEK: Is that it?
The black line is the inflation-adjusted rebound in the S&P 500 since March, compared to recoveries from the 1929 depression low, the 1974 oil crisis low and the 2002 tech crash low. So far, so good—but if this is anything like past recoveries, now we go sideways.

THE GOOD NEWS

A little retail relief
Canadians are opening up their wallets in a way they haven’t for months. Retail sales jumped one per cent in June from May. Rising prices at the pumps accounted for part of the increase, but even after stripping that out, we’re spending 0.4 per cent more on everything from food to sporting goods. This is the fifth increase in the last six months, a hopeful sign that Canadian consumers are on the mend.

Better homes
America’s housing market is showing more encouraging signs of life. In the three months ending in June the S&P Case-Shiller home price index rose 1.4 per cent from the three months ending in May, the second straight monthly gain. House prices also rose on a quarterly basis for the first time in three years. Even so, U.S. house prices are still falling on a year-over-year basis—they’re just not falling as fast as they were.

Not so glum
U.S. consumers perked up a bit in August. The Conference Board’s consumer confidence index rose to 54.1 from 47.4, beating expectations. Americans felt better about the current economic situation, their future prospects, and the job market. Still, the index is far below 90, which is where it should be in a healthy economy.