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Archive for Tuesday, April 21, 2009

Recession recovery: Will we know it when we see it?

April 21, 2009

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Justin Hill Jr. isn’t sure when the U.S. will start climbing out of its economic hole, creeping back up the steep walls that have been bored deep into a collective financial abyss.

But he’s absolutely confident he’ll recognize the monetary rise, once it arrives.

“When people start buying again,” Hill said.

By “people,” the president of Lawrence Paper Co. means his customers — and, by extension, he’s thinking about those customers’ customers, and their customers’ customers, and on down the line in what has become an increasingly complex financial system that operates in a world that continues to live by a set of oh-so-simple truths.

Derivatives, mortgage-backed securities, toxic debt and other financial terms have grabbed the public’s attention as the recession has taken shape, only to remain amorphous as their actual meanings escape comprehension.

Instead, people who rely on real customers to buy real products or actual services find themselves looking at their own bottom lines for answers, instead of relying on a constant stream of policy moves, government bailouts and regulatory changes coming out of Washington to provide “the answer.”

Hill, for one, fears that the government’s ongoing involvement in the economy only will make matters worse. He doesn’t enjoy the thought of elected officials making major adjustments to the free market, as they did back during the Great Depression.

“Unfortunately, I don’t see much evidence that we’re that much smarter now than we were then,” Hill said.

Defining the bottom

So when will the economy hit bottom?

The UCLA Anderson Forecast, released at the end of March by the university’s Anderson School of Management, determined that real gross domestic product had declined at a revised 6.1 percent in the fourth quarter. The forecast calls for declines during the next three quarters of 6.8 percent, 4.5 percent and 1.7 percent, respectively.

Such prolonged contraction will leave the U.S. with 7.5 million fewer jobs than at the country’s high before the recession, the forecast said. Unemployment should peak at more than 10 percent in mid-2010, then continue above 9 percent in 2011 as the “employment recovery from the 2007-2009 recession remains ‘long and arduous.’”

George Bittlingmayer, a Kansas University business professor, said that actions in Washington certainly would have a major effect on the economy for the coming weeks, months and years to come.

But, just as past investment results are no guarantee of future performance, forecasting exactly when the economy might emerge from its funk is an exact process.

“I don’t know, and I don’t think anybody knows,” Bittlingmayer said. “I think a lot of people respect — who put billions on the line, like Warren Buffett — will tell you it’s very tough to know.

“A lot of it depends on what we do in the meantime — reforming the financial sector, which is priority one. But I think there are some encouraging signs.”

The Fear Index

Stocks generally have been beginning to trend up, although plenty of ups and downs remain, he said. One data source he likes to track is the Volatility Index, or Fear Index, which is VIX on the Chicago Board Options Exchange.

The index measures the collective mood of investors, by measuring how much volatility — price swings from the norm — they expect into the future.

As March ended, he said, the index was at 43, or more than twice the general index of 20 that had been the norm until late 2007. But it also was below the peak in the 70s that came in October 2008.

“If you view it as a thermometer that measures the level of fear in the patient, the fever’s come down but probably still needs to come down some more,” Bittlingmayer said.

Once the index cools down to levels below 30 or, better yet, 20, the economy likely will be headed back in the right direction, he said.

The little signs

Ben Jones figures he’ll have an up-close view of the economic recovery, whenever it comes.

That’s because he works for the Union Pacific Railroad, the pervasive hauler of freight from the Port of Los Angeles to points east, through Lawrence and on to Chicago and other transfer points, for dissemination to other carriers and delivery to company distribution centers, production complexes and other places where the economy inches closer to the consumer.

Whether it’s agricultural products, automobiles, coal for energy — anything, really — Union Pacific can have a hand in moving it all around. And so far, at least, the numbers are down.

Just look in Lawrence: A year ago, the railroad was running at capacity, with 80 or 90 trains a day barreling through Lawrence. Now it’s down to 60.

“We’re one of the indicators,” said Jones, who tracks the railroad’s activities in Kansas and Missouri. “When people start ramping up manufacturing again, we’ll know it. We’ll know, on the front end, that people are ramping their business back up.”

— Transportation reporter Mark Fagan can be reached at 832-7188. Visit his Wheel Genius blog at LJWorld.com/weblogs/wheel_genius, and follow WheelGenius at Twitter.com.

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