How Bad Could It Have Been?

A recent academic study called Financial Crises and Economic Activity, written by Stephen G Cecchetti, Marion Kohler and Christian Upper, has implications for the current strength and trend of the U.S. and Global economic recovery.

The paper examined 40 systemic banking crises since 1980 and evaluated the real output costs of these crises. The conclusion:

“First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.”

How bad could it have been for us this time? The mean peak to trough decline in GDP for the 40 crises was 18.4%, with a median decline of 9.2%. Also, in one crisis, it took seven years for GDP to get back to its pre crisis level.

Read the original study here.

Another Greenshoot

Another green shoot in the economy hit the tape last week:

"FedEx Corporation (NYSE: FDX) today announced that it expects to report earnings of $0.58 per diluted share for the first quarter ended August 31, down 53% from $1.23 per diluted share a year ago. The company's guidance for the quarter was $0.30 to $0.45 per diluted share."

"FedEx expects earnings to be $0.65 to $0.95 per diluted share in the second quarter, which reflects the current outlook for fuel prices and a continued modest recovery in the global economy."

How many green shoots equal a recovery?

More Bad News

The Chicago Fed National Activity Index was just released and it showed a −0.91 reading in December, down from −0.29 in November. All four broad categories of indicators made negative contributions to the index in December.

This is not a well known economic report, so here is more on it:

"the CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend."

"The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. The derived index provides a single, summary measure of a factor common to these national economic data."

Baltic Dry Index

The Baltic Exchange Dry Index (BDI), which is a daily index made up of 22 key dry bulk routes recorded by the Baltic Exchange in London has taken quite a fall the last two weeks. It is still way above the last peak so it remains to be seen if it has bottomed here.

Dry Bulk shipments are considered by some to be a good indicator of economic activity.