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Investing Specialists

Spying the Green Shoots

We are seeing some signs that parts of the economy may be turning.

A version of this article appears in the May issue of Morningstar StockInvestor.Click hereto learn more about StockInvestor.

The economy is in tough shape currently, and we are probably experiencing the worst recession since World War II, or very close to it. There are four metrics considered to be the gold standard regarding the health of the economy--industrial production, real income, employment, and real retail sales. All except real income are at their worst levels compared with the six previous recessions. When all is said and done, I expect that the economy will decline around 3% from its high in the third quarter of 2007 until the economy bottoms sometime in the second or third quarter of 2009. This would also be in line with the recessions of the mid-1970s and early 1980s, but far better than the 20%-plus decline reported during the Great Depression. Unfortunately, unemployment, a lagging indicator, is likely to peak later this year or even early 2010 at something like 9%-10%.

Some Early Positive Signs, but Still Fragile
We are seeing some signs that parts of the economy may be turning. However, we must strengthen our financial system and avoid a catastrophic auto industry shutdown for things to continue to improve. My analysis focuses on the positives--the so-called green shoots--because the negatives are well known and we are 17 months into this recession, the longest recession since the Great Depression. However, we would be careless not to acknowledge that the current situation is bad, especially regarding employment and the banking system. We are on a knife's edge too, with just one stupid policy decision or negative event potentially undoing our progress.