Positive Signs 10/20/2008

Barring unforeseen surprises, of which there have been many, there seems to be light at the end of the tunnel of economic crisis. There are several signs of (the overused term) “cautious optimism” showing their heads long before Groundhog’s Day.

First, interbank lending rates are down today to the lowest level since September 30. That does not mean the credit crunch is over; in fact, it is long from ending. However, the lower rate does mean a larger number of banks are willing to lend to other banks – a statement of rising confidence in the viability of the banking industry. Confidence needs to increase even more before the credit crisis ends, but a glimmer of hope is showing.

Second, and quite a surprise, the Conference Board reported today a slight increase in leading indicators. Caution: this does not mean business will be booming soon. Nor, with a one-month increase, does it mean the economy is turning around. Having expected a decrease in the indicators, though, the very slight increase is welcome news. There is little question that the economy will continue to fall for some time; perhaps the slight rise means the fall will not be as severe as some expect. If there is continued rise in the indicators, a turn in the economy could be expected in less than a year.

Third, there is less and less doubt that the government will create another economic stimulus package. The style of the package will depend on the creators: either the current administration or a newly elected one (of either party.) Certainly, the infrastructure needs investment, and along with encouragement to the housing industry, a stimulus package can in short order return thousands of unemployed workers to newly created jobs.

Before dancing in the streets in celebration of an economic recovery, temper all the above with the size of the deficits that will follow, and the enormity of the national debt. The United States will be financially weakened for many years to come. We have put ourselves into a large hole and now face the perhaps impossible task of digging out.