The Sunshine Issue

Bad news is much like any other consumable good: increased consumption brings with it diminishing marginal returns. People are inoculated against it, their tolerance has been built up. Ever greater doses of despair are needed, to the point where moderately bad news has begun to be interpreted as good news.



Please prepare yourself, for what I am about to discuss is not the "things are getting worse at a slower rate" kind of good news that I have touted in the past, not some bad news with more flavoring, but rather a healthy dose of mediocre news that would be hard for the casual observer to call "bad" in any sense of the word.



First, I direct you to an article by LM:

Some recent examples of a potential turnaround are:
Lst week’s news from the Commerce Department that durable goods orders were up 1.9 percent in April at $161.5 billion;


A ecent analysis from freight transportation consultancy FTR Associates indicating that the worst of the recession is over, estimating that GDP growth will rise 2.7 percent in 2010 although “the road to recovery is likely to be difficult”

A report from the Conference Board indicating its Consumer Confidence index
was up for the third straight month in May.

In another glimpse of positive news, the Institute of Supply Manufacturing (ISM) reported today that its monthly PMI (formerly known as the Purchasing Managers Index) hit 42.8 percent in May, ahead of March’s 40.1 percent. A PMI reading of 50 or better represents economic growth, but the index has been trending down for the past 16 months. December’s PMI was at a low of 32.9 and has gone up gradually every month since then.

Here is some more good news on the financial front. This is from the Cleveland Federal Reserve:

The probability of recession predicted by the yield curve is very low and may seem strange in the midst of recent financial news. But one consequence of the financial environment has been a flight to quality, which lowers Treasury yields. Furthermore, both the federal funds target rate and the discount rate have remained low, which tends to result in a steep yield curve. Remember also that the forecast is for where the economy will be in a year, not where it is now. However, consider that in the spring of 2007, the yield curve was predicting a 40 percent chance of a recession in 2008, something that looked out of step with other forecasters at the time.

The yield curve is the ratio of short term interest rates to long term rates. An inverted yield curve is when short interest rates are higher than long term rates, meaning that short term money is "riskier" than long term money. Long term rates are higher for a reason, there is more risk involved and you are being paid to tie up your money for so long. When short term rates are higher than long term rates, this means that people need money, and they need it now in the short term. This usually indicates a recession in about a year as the cost of capital works its way through the economy.

I remember my professor at UNLV talking about this. He joked that we should all get good paying jobs now before the recession really started. This was in 2006 when the inversion happened and few of us at that time knew what the hell this guy was talking about.