When will the economy turn around?

Everyone seems to be asking, “When will the economy turn around?”. I know how to tell with certainty when it is turning; I call it the <em>Wall Street Journal</em> Headline Economic Activity Gauge. But before I explain how it works, I want to talk a bit about what we hear from our government as well as from “Main Street” that banks are not lending and, until they do so, our economy won’t turn around.

At least here in Northern California banks and many commercial finance companies, insurance company and other non-bank lenders ARE lending – though thoughtfully and cautiously as they should be in an uncertain economy. A reasonable amount of debt is available for well run middle-market companies that are maintaining stable revenues and profit margins.

As I see it, availability of credit for middle-market companies is not the gating factor hampering the growth of the economy and creating jobs. The main issues are the lack of demand for consumer products or services as the consumer is hunkered down hoping not to lose his job and the hesitancy on the part of companies to take on anything but the least amount of debt possible, delaying building inventories, acquiring new equipment or other growth financings.

Not withstanding all the trillions of our tax dollars the Federal Government throws at it, the economy will not turn around until we have worked through the excess of the recent past – way too much residential and commercial real estate, way too many retail stores providing products that we can no longer afford, way too many models of automobiles that use too much gas and way too many auto dealerships that try to sell us those cars. Only then will consumers start buying again and will businesses start seeing demand for their products and services and have comfort in borrowing to grow to meet that demand.

And, “so,” you ask, “when will that happen?” And my answer is, “look to the <em>WSJ </em>Headline Economic Activity Gauge.” Simply put, count the number of <em>WSJ</em> business article headlines that are positive, neutral and negative in each edition. When the balance changes from negative to positive, you can bet the economy is improving. Take for example the Pacific Coast Edition of Friday, March 20, 2009. Here is how the headlines breakdown:

Positive (6)

  1. Hermes Posts Higher Sales, Profit
  2. Wal-Mart Increases Employee Bonuses
  3. Corning Sees Pickup in LCD Demand
  4. Chinese Mobile Firm Lifts Profit
  5. Alibaba.com to Raise its Spending on Staff
  6. Cheers for Fed Action Echo Across Atlantic

Neutral (3)

  1. Cost Cutting Boosts 3Com to Profitability
  2. Lennar to Buy Back Land at Discount
  3. GE Says Finance Unit Won’t Need Capital Injection (While Loan Losses Mount with Higher Unemployment, Worst-Case Scenario Would be Break-Even Results)

    4.  

Negative (22)

  1. Travel Spending Sinks Sharply
  2. House Passes 90% Bonus Tax Bill; Hit Would Affect Major Banks
  3. Wall Street Shudders as Lawmakers Take Aim at Pay
  4. Downturn Heightens China-India Tension on Trade
  5. UK Public-Sector Debt Soars as Crisis Deepens
  6. Risks Emerge in Greece’s Cornerstone Industries
  7. Single Industry Towns Wonder How Much Stimulus Will Help
  8. U.S. Offers $5 billion to Car Suppliers
  9. As Net Sinks, FedEx Seeks Signs of Stability
  10. EU Steelmakers Project Losses
  11. BAA (Ltd.) Must Sell 3 UK Airports
  12. Barnes &amp; Noble Falters
  13. Crocs Seeks to Extend Debt Deadline
  14. [Greenbrier Hotel] Resort Seeks Chapter 11
  15. Eddie Bauer Filing Raises Doubt About its Viability
  16. Blockbuster Creditors Pact is Reached; Quarterly Loss Reported
  17. Gehry Manhattan Project Faces Market Pressures
  18. Palm Battles Slowing Sales
  19. Ticketmaster Posts Loss of $1.07 Billion
  20. Fed Skeptics Punish Stocks, Dollar
  21. China’s Shenzhen Development Bank Profit Drops 77% for Year
  22. France’s Iliad (broadband provider) Net Profit Falls 33%

 

Maybe not terribly scientific. I may not have gotten all of the articles and may have put some into the wrong category. But you get the point. We still have a ways to go before things improve. But don’t blame the banks for not aggressively lending in this environment. That’s how we got in to this mess in the first place.

I appreciate your comments and thoughts.