Flying Pink Unicorns

The recession will end in July, give or take a month or two.

Yup, I have finally figured it out, and this prediction will not likely be retracted.

On December 12, 2008, I posted that the recession would end on June 17th, meaning really June of this year.

http://flyingpinkunicorns.blogspot.com/2008/12/june-17-th-2009.html

My thinking was that as of June the recession would have been going on longer than any since World War II, and that a fair bit of the bloodletting had already took place.

Alas, on February 8, I retracted that prediction, fearing the banks were in truly horrible shape, and that it would take months, at a bare minimum, to even begin to clean them up.

http://flyingpinkunicorns.blogspot.com/2009/02/i-was-wrong.html

I guess I lost my nerve.

A few weeks back, the administration released the results of the so-called stress tests, indicating what would happen to the banks if unemployment went over 10% (a stressful situation for banks' balance sheets). The results indicated that the banks were in MUCH better shape than we had thought. Sure there were a few, notably Bank of America, which needed more capital. It was decided that 10 large banks needed a total of $75 billion more in capital, with Bank of America needing $33.9 billion.

In the few days following the results of the stress tests, several banks raised billions in capital, which would have been impossible late last year due to the fear in the financial markets about the banks. This was a loud (but largely unnoticed) vote of confidence in the banking system.

Anyway, the recent unemployment numbers have been godawful. The number of first time claims for unemployment, dropped by 13,000 last week, but were still at 623,000, a terrible number. That's the sort of number you'd expect when the economy was deep in recession. However, unemployment is what is referred to as a lagging indicator. That is, when business first starts getting better, you force your current employees to do a little more. Only when it keeps getting better do you finally take the plunge and hire new people. So even after the economy begins growing, everyone, including me, expects that unemployment will get worse. We will certainly see 10% before 2009 is over, and could conceivably see 11% early next year. But the worst is very very likely over. Barring a huge new shock in the banking system, the less bad news we've been hearing about the credit markets, coupled with more federal stimulus money, rock-bottom interest rates and the small Obama tax cuts will cause the economy to begin growing very soon. Almost certainly during the Fall, and probably during the Summer. Do hold the champagne. The mere fact of growth of GDP, in and of itself, doesn't mean too much for the great majority of people (though it does help the federal budget). But this time it may mean a little bit. I'm a big believer that people and businesses don't react to numbers that much, they react to conditions on the ground. But hearing a positive GDP number will almost certainly give business and consumer confidence a boost. And such a number is very possible for the quarter which runs from July- September of this year.

If I had to predict, (guess, really), I'd guess that the recovery is for real, but not vigorous until early to mid 2010. Figure that unemployment will begin to fall by about May 2010, and fall sharply at that. Given that by May 2010 it will be about 10.5% I suspect, it can fall very fast without worrying anyone that the economy will overheat and cause inflation. In about April-May 2010 the fed can begin draining the economy of the extra money it created in 2008 and 2009, and begin raising interest rates. The day I can advocate for that in my blog will be a good day indeed, for all of us.