ECONOMIC HEALING, From Milton Ezrati, senior economist and market strategist, Lord Abbett
Financial markets began to show clear signs of healing last spring—a pattern that has continued and should support both financial and economic recovery this year. One crucial gauge of this healing is the TED spread, which measures the premium rate above Treasury bills that financial institutions charge each other for short-term loans, and typically averages between one-quarter and one-third of a percentage point. Late in 2008 and early in 2009, it widened out to more than four and a half percentage points. With this unprecedented premium the banks screamed that they had no trust and no willingness to lend, not even to each other. But by April, that premium had come in to about one percentage point, and today the TED spread has returned to normal, even actually a little lower. In a similar way, shrinking credit spreads speak to the healing that has occurred. In the worst of the crisis, low-grade bonds had to pay a yield 21 percentage points above Treasury bonds just to get noticed—a full 10 percentage points more than ever before. But by last May, that spread had dropped substantially, and today is significantly less than 10 percentage points. These spreads are still wider than they have been historically, but the dramatic way they have come down speaks loudly to improved confidence and a renewed willingness to trade. Along with this financial healing, signs began to emerge in late spring and summer, even as talk of a “great depression” remained commonplace, that the economic slide was stabilizing and probably beginning to turn upward. The broad-based Conference Board Index of Leading Economic Indicators, for example, begun to rise last spring, and has risen now for more than six months in succession. The consumer has hardly returned to his or her free-spending ways, but gradually the cutbacks of late 2008/early 2009 have given way to modest increases in spending. Business also has begun to increase its orders for new equipment, systems, and technology, albeit tentatively. Even in residential construction, where the trouble started, the inventory of unsold homes has shrunk sufficiently enough to slow and, if tentative signs are to be believed, even stop the decline in residential real estate prices, on average. There are even signs that buyers and builders have begun to step up their activity.
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