DuPont Economist Sees Likely Upturn in August

Wilmington, DE, May 26, 2009--A growing assortment of leading indicators suggests that the U.S. economy is nearing a business cycle trough, which would mark the end of the current recession, according to DuPont economist Robert Fry Jr. in his newsletter.

He said that money supply growth turned up sharply last October and that the lag from money supply growth to industrial production has averaged about 10 months. That would suggest a bottom for industrial production in July and an upturn in August.

He said that the skeptics who argue that monetary policy is not working in the current financial crisis fail to appreciate the long lag and the fact that money supply growth did not accelerate until October.

He also noted that the Institute of Supply Management’s new orders index bottomed at 23.1 in December and rose to 47.3 in April. (Readings above 50 indicate growth.) He said the index has tended to lead industrial production by about seven months, which is also consistent with a July business-cycle trough.

Also, stock prices bottomed on March 9. Stock prices have led industrial production by three-to-five months at business-cycle troughs, suggesting that production is likely to hit bottom in the June-August period.

The University of Michigan’s Consumer Expectations Index – a component of its Consumer Sentiment Index – hit bottom in February. Historically, it has led industrial production by five months, also consistent with a July trough.

And he said the Economic Cycle Research Institute’s Long Leading Index hit bottom in November and is designed to lead economic activity by as much as eight months, so it too is consistent with a July trough.

In the past, the deeper the recession, the stronger the ensuing recovery has been, Fry noted. A severe recession – marked by a 3% decline in real GDP – has typically been followed by a 7% increase in real GDP over the first four quarters of the recovery. Industrial production has risen by more than 10% in the first 12 months of such recoveries.

“We are forecasting a recovery only half as strong as is typical after a severe recession, but that still puts us well above consensus forecasts,” Fry said.

“If fiscal and monetary stimulus work, the recovery could be even stronger.”

He said the coming recovery is likely to be much weaker than recoveries from previous severe recessions but still stronger than many expect, at least initially as inventories are replenished and pent-up demand is satisfied.

"Companies that are not prepared for the recovery stand to lose market share, and – as Montgomery Ward learned as it lost market share to Sears during the recovery from World War 2 – market share losses during economic recoveries are often permanent.”