>BENCHMARKING RECOVERY (WELLS FARGO LIMITED)

Benchmarking Recovery: Rhyming not Repeating

Recovery signals are in the air, corroborating our statistical model estimates, yet also intimating that the character of this recovery already is different than prior recoveries. Consumer spending is up, reflecting income growth, however such growth does not primarily reflect earned income but rather federal transfer payments. Meanwhile, as many dear readers suspect, production and employment advances lag, as they have done in recent cycles. The current recovery reflects more a “statistical” recovery than a recovery for the “man on the street”. Finally, the shape of the recovery, a topic for almost every senior corporate strategy session, remains the product of the confluence of expectations on the future of key price variables for credit (interest rates), commodities (goods), the dollar (exchange rate) and labor (wages) for both private and public decision-makers.

Three questions will be addressed in this essay. First, what are the signals for the recovery? Unfortunately our profession and the media are infested with perennial bulls and bears who fail to acknowledge that the economy follows cycles and that providing insights to the economic turns and not popular entertainment, should be the product of our efforts. Second, what benchmarks do we have to measure the progress and character of the recovery? The picture on recoveries is never black or white but the many colors of the multiple sectors in myriad phases of improvement. Finally, what factors will drive the shape of the recovery? Mindless speculation on the shape of the recovery fails to provide any depth of thought or guidance to decision-makers on how we may track the unfolding pattern of the recovery.

Signals for Recovery: Models and Surveys
Recovery is the signal from our statistical model.1 Over the past two years, we applied this model to first identify the rising risk of recession and now the significantly lower probability of a recession going forward. The probability of recession two quarters from now has downshifted sharply over the previous quarter (Figure 1) with the latest recession probability at below one percent as to be in agreement with probabilities associated with prior economic recoveries. We reviewed a very broad set of variables in our model and the results imply economic recovery is likely in six months. Faithful readers also recognize that we had expected recovery in the second half of 2009 in our Annual Economic Outlook published in December 2008. Supporting evidence for economic improvement began to show up in our model in recent months in the regional Chicago Manufacturing Survey. While the official recovery call will come much later from the National Bureau of Economic Research, our outlook is that the recovery on a quarterly basis will begin in the third quarter of this year.

To see full report: BENCHMARKING RECOVERY