How long is this recession journey going to be?

Wednesday April 15, 2009

How long is this recession journey going to be?

Are we there yet? We may be in uncharted territory as far as the depth of the current economic turmoil is concerned



IF you have children, especially the talking ones and below five years old, this phrase is very common, especially when travelling.

My wife and I recently took our four-year-old daughter for a short break and this was the first time she was on a flight of a little over five hours, although previously we did take her to places of shorter distances by air or road.

It was a day-time flight, meaning she was wide awake throughout the journey. While we did tell her the flight would take over five hours, it is perhaps difficult for a four-year-old to comprehend or understand what five hours mean (although there’s no denying that she can count).

Hence, without fail and little to our surprise, she kept asking us the same question over and over: “Are we there yet?” Of course, we had no choice but to keep reminding her that the flight time was five hours and we would be there in four hours, thereafter it became three hours, two hours and so forth ... until we actually landed!

Now let’s be adults and think about the journey that we are in right now, the recession journey that started in December 2007 (well, at least as far as the National Bureau of Economic Research is concerned) and is now about 17 months old.

The question in everyone’s mind is: How long is this recession journey going to be? By historical standards, the longest journey in living memory for a recession was the 44-month recession period the world endured during the Great Depression of 1929-1932, while the shortest was the six-month period in the US economic contraction in the early 1990s.

The RM64,000 question is of course: “How long will this global recession last?” or in other words, “Are we there yet?”

While for a journey that has a definite time span, like taking a flight to a destination that one knows for certain the expected time of arrival, the current economic turmoil has no “final destination” and no timeline set as we are perhaps now in uncharted territory as far as the depth of the crisis is concerned.

Some investment gurus have called the recent turn of economic data points as confirmation that the worst may be behind us and that it is now time to accumulate stocks and assume higher-risk appetite.

We have observed in the past month a strong and meaningful rally in the global equity markets, to the extent that some are already saying that we are in a bull market (defined as rising 20% from the low).

But make no mistake. If one were to analyse the current market euphoria, this is in fact a third bull market that the Dow has experienced over the past six months and, on every occasion, the Dow had risen more than 20% from the lows. However, weak economic data points and failure of the US banking system saw markets making fresh lows yet again. Is it any different this time?

Some of the rationale for the current market euphoria are based on economic data points that boosted investors’ confidence on two counts.

First and foremost, they beat market expectations and, second, the data points showed that there has been some reversal in either the pace of decline or, better still, they showed that they have improved compared with the preceding month.

My analysis of these data points show that while it is clearly acceptable for investors to rush into equities if the monthly data show that they were better than expected, I am rather baffled as to the market’s reaction to data points that simply showed improvement on a month-to-month basis as it is rather clear that when some of these data points are compared with a year ago, the pace of fall is still large and, for some data points, they are still way below “normalised” levels.

For example, US construction spending showed a 0.9% decline in February compared with the preceding month’s fall of 3.5%.

However, when one compares this with before the start of the recession in December 2007, construction spending is still down by some 15%.

US housing starts too rebounded about 22% in February to 583,000, but when compared with a year earlier, they are still down by a massive 47%!

Other recent data that showed similar trends were the US durable goods order, which rebounded by 3.5% month-on-month in February. However, when compared with the December 2007 level, the number is still down by a massive 26%.

Meanwhile, US consumer confidence remains at near multi-year low (well at least as far as the March 2009 figures are concerned) while the US Purchasing Managers Index (PMI) of the Institute of Supply and Management (ISM) for both the manufacturing and the services sector remains deeply in contraction.

Hence, while we are seeing some sort of rebound in some data points, clearly the low base effect is taking shape nicely for investors to feel good for the moment.

In essence, what matters most are strong and sustainable rebound in consumer confidence as well as a growth in both the US PMI of the ISM indices.

Until and unless we are able to see some of these data points in a convincing manner, we have not taken the recession journey fully and, hence, we are not there yet.


Pankaj C Kumar is chief investment officer at Kurnia Insurans (M) Bhd. Readers’ feedback to this article is welcome. Please e-mail to starbiz@thestar.com.my