As the winter’s meltdown recedes, financial markets have gotten over their worries about Armageddon. Now they are waiting for evidence that life really does go on.
Most stock markets around the world retreated last week, many for the first time in more than a month, while commodity prices also softened. Meanwhile the dollar reversed course and strengthened moderately.
Taken together, these developments point to a financial community that is in “show-me” mode. As in, “Show me that things really are going to get better.”
I suspect the next six to eight weeks will set the tone for the remainder of the year. Companies that have cut jobs by the millions will begin reporting second-quarter financial results that reflect some of those cost-cutting efforts. Since expectations are already very low, there is a decent chance that most of the surprises will be positive.
Data already shows that the U.S. housing market is stabilizing and that companies are not laying off employees nearly as rapidly as in the first months of the year. On the other hand, many state and local governments are slashing programs and payrolls in the fiscal year that begins July 1 because tax revenues have withered. This coming wave of unemployment claims would have been even worse but for federal stimulus money that many governments are using to mitigate the cuts.
By midsummer, the back-to-school shopping season will be underway. We will see whether U.S. consumers are ready to cautiously venture back to the cash register. A decent summer in the stores would make businesses more comfortable about stocking the shelves for the all-important holidays to come.
Everything, however, depends on the availability of credit. Without it, businesses cannot produce and consumers cannot buy. This recession has been much longer and deeper than others because the supply of credit was severely constricted when financial institutions had to focus on keeping themselves alive. Even households and companies that had cash were forced to hoard it because they could not assume that more money was available from their friendly bankers. This made everything worse.
The crisis in the banking system is over. No big institution is in danger of failing, and the process of returning emergency federal funds has begun. The remaining question is whether banks are willing and able to make credit available to worthy borrowers, and whether those prospective customers have enough faith in the banks and in the economy to use it.