One swallow doesn't make the spring.
Hell, several swallows don't necessarily make the spring, but if you saw a bunch of them scratching around in the back yard, you might surmise that the melt was on its way. In the same way, some recent events suggest that, contrary to the prevailing opinion, the worst of the American economy's winter may be behind us.
Weekly reports from the major department stores show that after a miserable holiday season, retail sales picked up in January. Automobile sales, while declining in January from a year ago, weren't as bad as either the industry or Wall Street had forecast. The final reading for the
University of Michigan's
sentiment index showed a rebound from its mid-January sounding, suggesting a pickup in confidence in the tail end of the month. Though distorted by seasonal and weather-related factors, there is no arguing that the January
was stronger than expected.
With an improvement in both investment-grade and junk-bond spreads vs. Treasuries, there was a surge in corporate-bond issuance in January, boosting companies' reserves. The
Fed cuts also have led to a burst in mortgage-refinancing activity. By reducing spending on monthly mortgage rates, consumers have freed up cash. Meanwhile, the stock market has lately improved, helping calm jittery nerves.
"Given all that's happened," says
chief U.S. economist Stephen Slifer, "I just have to think we hit a low point in December and we are now in recovery mode."
Yet even if consumer and corporate spending did, in fact, hit bottom in December, that wouldn't mean all the bad news is behind us.
"There's definitely some signs of marginally improved demand, but you still need to have a pretty good correction in inventories," says
Salomon Smith Barney
economist Christopher Wiegand. "Though it looks like that started to take hold in December, there's still further to run."
Inventory-to-sales ratios remain higher than most businesses would like, especially given that the economy cooled considerably during the past several months. Retailers, for example, want to reduce the stock on their shelves before placing too many new orders. That forces their suppliers to cut production. As a result, even as final sales improve, you can still see a contraction in the economy at large.
The Extreme Games
Because the government's inventory report comes with a two-month lag, it's hard to tell at what stage we are in the workdown. We do know, however, that production is getting cut back hard, and that should have a profound effect on inventories.
"We're getting something pretty extreme on the manufacturing side," says Jason Benderly, president of
. Benderly believes that U.S. industrial production probably contracted by around 0.5% in January, while retail sales grew somewhere between 1% and 1.5%. Such a sharp dichotomy could result in an outright contraction in inventories for the month. If that has happened, companies would soon find that they don't have enough stock on hand to keep up with demand, which in turn would lead to a pickup in production. It is possible that the economy will show a pretty dramatic rebound in the months to come.
That is nothing like the Wall Street consensus. The market is banking on the economy rebounding in the latter half of the year. As a result there has been a slight shift toward cyclical stocks, away from areas like consumer staples, but the most recent fund-manager survey from
shows that institutional investors' positions remain fairly defensive. If the economy comes back more quickly than the Street expects, many investors would be forced into playing a game of catch-up, racing to readjust their portfolios to an economic reality they were unprepared for.
"Everyone's effectively wondering how big a recession we're going to have," says Todd Clark, head of listed trading at
. "If the economy has troughed, that would pull that whole scenario into question."
Safe Harbor Statement
Although the stage may be set for such a rebound, risks remain. The economy's apparent improvement last month may have been only temporary, a brief respite from a continued decline. Even if the environment has gotten better, the layoffs associated with businesses' continued production cutbacks could damage a still-fragile recovery in consumer confidence.
So bear this in mind: In March, scores of bird enthusiasts flock west to watch for the arrival of the swallows to San Juan Capistrano, Calif. Others head for Hinkley, Ohio, where each year the buzzards make their return.
It is as yet unclear which bird Wall Street will be contending with this spring.