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0 Apr 29 2010 @ 10:20am by Matt Smith in Crude Oil, Economy

Economic recovery does not mean we are at pre-recessionary levels

I agree data are improving. I agree things are looking better. I agree it is good news that we are seeing improvement across the US (ISM manufacturing, Case Shiller Housing Index, Nonfarm Payrolls, insert favorite data point here ____________). However, regardless of how Pollyanna-ish your view may be, you cannot say that the recovery of the last nine months (give or take) has clawed us back to the levels of where we were before ‘the great recession’ – in terms of GDP, in terms of industrial production, or in terms of oil demand. It is just not the case.

Granted, industrial production has shown nine months of improvement, the manufacturing sector has expanded for eight consecutive months, and gross domestic product (aka economic output) was up a solid 5.6% for Q4 2009. Heck, even the Case Shiller Index is showing positive house price growth on a year-over-year basis (for the first time since late ’06). But these economic indicators are coming from an extremely depressed place, where they were hanging out at a bar, drinking away their sorrows with oil demand. Yet it is easy to see why current data are interpreted as being rosy; to a certain extent they are. When comparing data on a year-over-year basis (=base effect), they are bound to look great as the numbers in the year prior were so awful:

However, if you look at the indices (rather than on a year-over-year basis) for such data as industrial production, you can see that the recovery has not been all that impressive; data have failed to come within a country mile of pre-recessionary levels. If this is the best rebound that the recovering economy can muster, we could be in the opening scenes of our own Greek tragedy:  

In terms of our burrito buddy distillates, its demand runs on a lag to industrial production, so it has only recently bottomed out on a year-over-year basis. Meanwhile, indexed demand (although smoothed), shows that a solid return in demand is yet to kick in at all. 

So, herein my problem lies. Yes, recovery is underway, but it is spluttering along, all the while being driven by government spending. It would take a fully-fledged cycle of strong economic growth to get us back to pre-recessionary levels, but instead we are facing a difficult enough battle to establish a jobless recovery (with 8.4 million jobs lost in 2008 and 2009). As the US looks in flux (fluxable?), Europe looks in trouble, so once again we look to the (Far) East and the emerging markets to carry the burden and lift the global economy back to its feet again. Can they do it? There’s always hope.  

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