2010: The Promise of Recovery! Did it Really Deliver? |
New Year’s eve, people said good bye to 2009 and warmly welcomed 2010 with new hopes and dreams. So did the U.S economy, as it said goodbye to the disastrous 2009, which reflected the worst of the worst economic crisis that has hit the U.S economy and the world for a matter of fact since the Great Depression in the 1930’s, and welcomed 2010 with a strong belief that it will be a year of recovery and prosperity.
The economic crisis did show its worst side in 2009, the negative GDP growth rates existed in that year, and the excruciating unemployment rates were also witnessed throughout 2009.
Analysts expected to put all that behind in 2010 and January did not prove them wrong as then the 5% growth in GDP during 2009’s final quarter was released. Yet nothing went as planned or hoped for, and I will explain why by narrating the events of 2010 each quarter individually.
January to March: The Promising Quarter
In general, the economic figures, gauges, and indicators during that quarter showed new strong and forceful recovery therefore the Obama administration decided that aid and tax cuts were no longer necessary. The highlighted program that got expired by the end of the quarter was the tax cuts for first time home owners.
Beginning with the Housing sector, which has started the whole global mess in the first place; its performance during the first quarter was brilliant, where all of the sector’s major indicators showed a remarkable recovery. Housing starts, Building permits, New, Pending, and Existing home sales all reported healthy performance where sales and construction activities rocketed.
That was the best news the U.S economy received since Lehman Brothers went bust because of the nature of the very high multiplier the Housing sector has; a new home purchase means buying furniture, hiring construction workers and interior designers, and above all that, it means that individuals can afford the purchase and are feeling secure in their jobs.
The labor sector was also on the same pace as housing, unemployment rates dropped from the excruciating 10% to a more pleasant 9.7% and the gross number of jobs added during the quarter as reported by the infamous Non-farm payroll report was 190 thousand jobs.
Manufacturing activities in the U.S which is believed to be the reason behind the remarkable 5% growth in 2009’s last quarter did not stop growing as the Institute for Supply Management reported that its manufacturing index has climbed from 55.9 to 59.6 during the quarter while the Services activities followed that pace with the Non-manufacturing index climbing from 50.1 to 55.4.
Global investors and by global I mean those trading dollar denominated commodities believed that the quarter was sealing the deal and confirming the end of recession, therefore the Greenback bounced from the troughs yet Gold and Oil kept on trading in a narrow range with a slightly upward trend.
By the end of March economists and analysts believed that the economy is back on track as it took off towards lower unemployment rates, higher income and accordingly boosted production.
April to June: Q1 Was Only April’s Fools
The quarter kicked off with the illusion of stronger economy and stable recovery, which led to the fatal mistake of ending the very effective tax cuts program for first time home buyers. The quarter proved further more that Q1 was an illusion of recovery when the GDP reading showed only 3.7% expansion.
This quarter surely proved the true fragility of recovery, and the horrifying instability in the economy. This quarter also proved that an economy will not survive with excruciating unemployment, impossible credit conditions, tough international trade competition, and most importantly poor planning.
The main highlight of the quarter is the frightening slump of the Housing sector; the sector was performing beautifully in the second quarter and delivering better results than the prior quarter, yet June witnessed total failure in the sector. All the numbers, figures and indices turned to negative in June and the Housing sector was threatening a double dip recession, but what happened?
Well the illusion of a recovered economy happened; June proved that the economy is still fragile and in critical need for aid and assistance. As I mentioned previously, policymakers believed that the economy has fully recovered and accordingly shutdown some of the tax cuts programs with the intensity in the housing sector, the effect did not show until June. That was when they realized their terrible mistake and that was the solid proof of the economy's fragility and weakness.
Another highlight during the second quarter was the one thousand points drop in the Dow Jones Industrial Average index. The crash simply proved how irrational and afraid investors were and still are, so what triggered it?
Well it was a simple three digit mistake; it was an error from a trader that put a sell order with a "B" for billion instead of "M" for million on P&G shares and simultaneously Procter & Gamble's share price dropped by more than $30. But it did not end there, because this drop made investors doubt whether there is a hidden reason behind this drop that they did not know of. Accordingly investors started a strong sell-off wave with the European debt crisis being the major doubt or focus on their minds.
By the end of the day, news emerged that the error was made by a trader in Citigroup -though Citi denied that an error was made by one of its traders- and accordingly prices returned to normal levels. However, the consequences were rather severe, as investors started a strong sell-off behind irrational reasons.
Speaking of confidence, the most confidence destroying event of the year happened during the second quarter, and it was the extreme amplification of the European debt crisis. The Euro Zone fell in a dilemma after Greece, Ireland, Spain and Portugal announced code red and activated their alarm bells.
Germany, which is the continent's largest economy, suffered the most as the majority of the debt crisis woes weighed on its shoulders dragging down the economic performance and stability and forming a huge barricade before the recovery process. The U.S dollar gained a lot of strength from European deterioration, while the Euro fell versus almost all major currencies as investors speculated that the debt crisis might probably result in the Zone's collapse.
Back in the U.S the labor sector varied in performance during the quarter as unemployment rates surged from 9.7% up to 9.9% then back to 9.7% by June with the reason behind this volatility is the different levels of confidence across the quarters which controlled the employers' willingness to add new employees.
Investor's confidence deteriorated through this quarter as both Europe and the U.S. reported frighteningly weak fundamentals, therefore global economy witnessed an unprecedented phenomenon, which is the positive direct relationship between the USD and Gold as investors considered both as safe havens.
About the author: ecPulse
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