Preliminary Report---The April-May 2010 survey of Lehigh Valley businesses shows that local businesses now believe that the economic recovery has started and for the first time since July 2008, the number of people hired locally is higher than those laid off.

There is a major difference between economic forecast and prophecy. Economic forecast is based on mathematical modeling which estimates the most probable outcome. Economists do not see the future, however, short of any help from the Oracle at Delphi, economic forecast is the best game in town. The problem is often the fact that people forget the part about "this is the most probable outcome."
Very few economists predicted the collapse of stock market in 2007, or for that matter in 1929. Both years observed significant increases in the value of stocks. By August 1929, DJIA recorded a 27% gain for the year. By October 2007 DJIA was up a more modest 12% for the year. Few forecasters saw a market crash back in 1929 or for that matter in 2007. In these two occasions, the Oracle at Delphi would have given economists a run for their money. However, there are always forecasters who predict/prophecies something totally out of the main stream. And there are rare times, twice in the last 70 years, that these forecasters were right. It should also be noted that even a broken clock is correct twice a day!
To answer the question; "Are we out of the woods?", we should consider that although the current recession started somewhat similar to the great depression, it did not follow its path. The stock market dropped by 57% between the August 1929 and December 1930. For a few months in early 1930s DJIA appeared to be rising, before it dropped straight through summer of 1932, losing 80% of its value in the process. This time round, however, while DJIA dropped by 49% by the end of February 2009, it then started to show upward movement from the end of March 2009. And this time the upward movement did not fizzle out, as it did in 1930, it is still continuing. As of the end of December 2009, the DJIA has risen by 48% over its lows for the year and is "only" 23% below its August 2007 high.
The division between the two crashes, the one in 1929 and the one in 2007, is not in the initial movement, both lost value exceptionally rapidly. It is in the recovery. The 1929 crash was followed by a couple of very short lived rebounds, and continued to decline. The 2009 stock market recovery is still going on.
It appears that Wall Street is out of the woods, the Main Street, however, is yet to see recovery.

Preliminary data for September shows that car sales has dropped to 9.4m SAAR, down from 14.1m SAAR in August 2009. Did the car sales crash?

Cars and light trucks sale which was plummeting since November 2007, reversed course in July and August 2009 thanks to the "clunker's program." Did the program work? Well, it clearly caused more than half a million cars to be sold in two months time. The question is was this above what the market was already doing, or just speeding up the sale of cars which were going to be sold anyway?

In June 2009, there were 9.7 million cars at seasonally adjusted annual rate (SAAR) sold. SAAR means that the monthly data are adjusted for seasonality and then reported in annual rates. This number rose to 14.1m (SAAR) by August. The difference is around 3m (SAAR) vehicles, which translates closely to the around half a million extra sales generated by the clunker's program.

There are some economists who believe that the clunker's program just sped-up the sales which were about to happen and thus will take it back from the sales in the coming months. Thus they believe that the number of cars sold will drop below its previous level, it will give back the 3m SAAR extra sales that took place in July and August. Another group of economist believe that this increase in sales will create a momentum which may result in a higher level of sales in the following months. And then a large number of economists believe that most of the sales generated under the clunker's program were new and thus at end of the program sales will go back were they where before the start of the program.

Preliminary data for September shows that car sales has dropped to 9.4m SAAR, down from 14.1m SAAR in August 2009. Did the car sales market crashed? The short answer is NO.

Actually, the program appears to have caused the sale of an extra half-a-million cars in summer of 2009.

The clunker's program did grow the sales during July and August 2009. When it ended, so did its impact. The September sales level of 9.4m SAAR cars is inline with the sales level before the clunker's program was instituted.

It also appears that the economists who predicted the impact of the program as transitory were correct. While car sales dropped, it went back to pre-clunker's program level. The impact of the clunker's program was a one time increase in sales, it neither took away from future sales nor did it spread into future months.

The important question at this juncture is when we are going to see a real increase in car sales? On that subject views are all over the map, from the second quarter of 2010 all the way to early 2011 are among most popular projections.

Is the economy in a deflationary mode? Compared to August 2008, the consumer price index is down by 1.5% which clearly meets the criteria of deflation. However, there are a number of qualifiers which may entirely negate the issue of deflation, at least for now. As figure below shows, all the major categories of inflation have shown increases for the twelve months ending in August ‘09. For example, food recorded 0.6% inflation and housing 0.9% inflation. It should be noted that the sales price of houses is not included in the calculation of housing inflation, in its stead, change in rents are measured as the monthly inflation rate is calculated. And rents have increased by 2.0% in the 12 months ending in August ‘09. The only exception is transportation which recorded a 10.8% deflation, single handedly pulling the overall inflation down to a 1.5% deflation. Almost all the decline in the transportation category is due to a 30.5% drop in the price of motor fuel compared to August ‘08.

Actually items like hospital related costs and educational expenses rose at the unbelievable rates of 6.5% and 5.4% respectively.

Despite the strength of this, the worst recession since WWII, for all practical purposes, inflation is yet to swing to negative. The core inflation is not down and almost the sole reason for the decline in the overall inflation is the drop in the price of oil, which is a volatile commodity and is very likely to jump up as soon as the down slide in the economy subsides. Based on the current inflation distribution there is a strong likelihood that inflation will come back, with a vengeance, as soon as oil prices start to stabilize.

The results of the April 2009 survey of businesses in the Lehigh Valley recorded the first up-swing in and plans for future purchases and hirings. The fact that we observed significant improvements in plans for future purchases and hirings begs the question, is this the light at the end of the tunnel?

The April data about future plans are encouraging, and while they may not signal the beginning of the end of this recession, they clearly signal that local businesses are expecting the "end of the beginning" of this recession to be near.