The Triangle

Issue date: 5/15/09 Section: Ed-Op

Media Credit: Olivier Douliery MCT

They say crocuses are the early signs of spring. When this metaphor is applied to the U.S. economy, some people are now calling the economic crocuses the "green shoots" of the economic recovery. Admittedly, when I wrote the first version of this post in March I said it was premature to write about an early recovery in the United States' economy, but now in May the situation has strengthened and reinforced the theme of the first version, pointing to a faster than expected modest recovery in the coming months. The worst is behind us, and a feeble recovery should start in the fourth quarter of 2009 and a modest growth in 2010.

There are signs of glimmering hope coming from both leading and coincident economic indicators suggesting that the light is at the end of this year. There have been rises in the U.S. Treasury bill and bond rates. On November 28, 2008, the three-month bill rate dropped to 0.01 percent, signaling that the economy was in a liquidity trap and the recovery was a long way shot. This rate rose to 0.19 percent May 7, 2009. The 30-year Treasury bond rate bottomed out at 2.53 percent December 18, 2008. But it rose to about 4.2 percent May 7, 2009. Interest rates move up when the economy improves. Concurrently, the TED spread, which is the difference between rates banks charge each other for very short term loans (libor) and short term T-bills rates, is now 77.5 basis points, down from a peak of 464 basis points during the height of the crisis in October 2008. This suggests that the banks now have a lot more confidence in each other than they used to six months ago. The stress test confirmed that by showing the big banks don't need as much capital as was thought.

There is also an increase in the junk bond yield. The junk bonds include distressed bonds of companies in different sectors of the economy that are near restructuring or already are being restructured. The direction of change in the junk yield is a signal of change in confidence in the troubled sectors of the economy such as autos and financials. The average yield was about 20 percent last summer, and then it dropped precipitously to 9 percent in December 2008 at the height of the recession, after heavy selling by hedge funds who were forced to sell in the face of redemptions. It is now above 13 percent. While it is modest, it represents increased confidence in distressed companies like autos.

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