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Saturday, 1 August 2009

Mind Over GDP: Economist Says Recession Over But Psychology Key to Recovery

Friday's better-than-expected second-quarter GDP report is fueling talk about the end of the recession, which may become a self-fulfilling prophecy, says Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

"It's so psychological right now," Rupkey says, joking his old economics professors are junking their regression models in favor of psychology courses. "I don't want to shoot down the V-shaped recovery story because anything can happen and it is self-fulfilling."

Rupkey does believe the recession probably ended in May or June and that third-quarter GDP will be positive, if only because inventories have been slashed so much; because of how GDP is calculated, just a slowing in their rate of decline could add as much as 4% to growth. "We should be 31 days into a positive GDP growth quarter," he says.

More important than GDP is the Fed's industrial production data, which is next reported in Aug. 14, Rupkey says. "The minute that turns up," the recession is over.

But the economist's optimism about the sustainability of the recovery is guarded in part for the same reason he's upbeat about the current quarter.

"In the 1970s and 1980s businesses were flying blind," he recalls. "Now, everyone is pretty much on the same page....and the groupthink at the moment is ‘it's going to be a sluggish recovery'."

That mindset is being fueled, in part, by Ben Bernanke's dour outlook, Rupkey says, suggesting regulators have to walk a fine-line between cheerleading and talking down -- especially in the age of instant information.

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