Is the recession over?
The stock market sure thinks so.On May 31, the Dow Jones Industrial Average (DJIA) closed at a new record high of 3027.50. Big gainers centered in stocks that are considered recovery benefactors rather than recession stalwarts (i.e. chemicals, metals, paper stocks and transports). Minnesota Mining & Manufacturing Corp., General Electric Co., International Paper and Du Pont Co. closed at 52 week highs.
That was on Friday. On Monday, the DJIA set a new record, climbing to 3035.33, despite afternoon profit-taking. This marked the sixth straight daily advance for the DJIA, in which time it soared 135 points.
"The psychology of the people on the street and of my clients, has drastically improved since the December-January period," said Rich Miller, vice president at A.G. Edwards and Sons in Fort Wayne, Ind. "Low interest rates normally signal the end of a recessionary period. With interest rates coming down, purse strings are loosening up."
Fueling the DJIA rise and adding to the belief that the recovery is just around the corner was the positive economic news that came out last week. Sales of both new and existing homes were up in April and the gains were centered in the Northeast, the hardest hit of all housing markets.
Meanwhile the index of leading indicators rose for the third straight month. From an historical perspective, this means the recession is over. Three straight months of leading indicator upswings have foretold recovery in all eight of the post-World War II recessions.
So, does this mean economists think the recession is over, too?
"We think that the recession is roughly at the trough right now," said Mark Lasky, senior economist at DRI/McGraw-Hill Inc. in Lexington, Mass. "Signs of the pickup are coming from housing, higher durable good orders and car sales, which were up in May to 6 million from 5.5 million in April."
If the recession is indeed over, and the jury may still be out on that, then what kind of a recovery can we look forward to?
"As companies cut back during the recession, incomes were hit pretty hard," Lasky said. "So when consumers cut back, they were doing so in line with their decreasing incomes. Now, consumers are tapped out. So we can't expect them to start the recovery; it has to come from another source, and the other sources are still weak."
Lasky added that in past recessions, there was a much bigger downward swing in interest rates that led to a more pronounced pickup in investment. Unfortunately, we aren't likely to see that this time around.