One data point which is improving is the unemployment claims data and you generally don’t get a recession unless this data point is deteriorating. Last week the claims data dropped sharply to 391K from 428K. The BLS wrote a cautionary note that the dramatic improvement was probably due to some technicalities with seasonal adjustments. But this week the claims data only jumped to 401K and last week was revised up to 395K. So the average for last 2 weeks is 398K which is better than most of the readings this year.
A lot of retailers reported their September sales today and a majority of them did pretty good. Looking at the data so far it is hard to believe we have slipped into a recession. We may get there in a few months. Last week, Lakshman Achuthan from ECRI made a very strong call that we are definitely going to have a recession. ECRI has a pretty good track record and it is pretty uncharacteristic of economists to be so emphatic about their prediction. The other side of this recession call is being taken by Warren Buffet and CEO of Fedex who claim the business activity they are seeing doesn’t portend a recession. Considering what has been thrown at this economy from a confidence sapping debt limit fight, European problems, S&P downgrade of US debt and global fall in equity prices – I think the economic data is actually holding up quite well.
Regarding the market, the main catalyst for the rally of the last few days seems to be the commitment by European politicians that they need to recapitalize their banks. The rally started late Tuesday afternoon when the FT broke a story that at a meeting of European finance ministers their was broad agreement about recapitalizing European banks. The Europeans had so far been concentrating on fixing the problem by buying bad debt. Now they are thinking about dealing with fixing the banks directly. This is actually very similar to what happened in the US. The original purpose of TARP was to buy toxic loans but Treasury secretary Hank Paulson quickly realized that it would be full of problems and TARP was instead used to recapitalize banks. The US banks stress tests in 2009 further forced banks to raise more capital. These two actions are what really started the market rally in Spring of 2009 and recovery in the US. The Europeans have also done their own bank stress tests in the past but the general perception is that they are not really stressful. But now there is talk of again redoing the stress tests. This is a sign that these are early steps to determine the effect of a Greek default but now there will be a plan to recapitalize the banks.