Economy Begins to Show Signs of Life, But Will It Last?

After an August filled with mostly encouraging economic news, many leading economic forecasters are now predicting that the US gross domestic product (GDP) will turn positive in the third quarter of 2009.  It now appears that US manufacturing may lead the charge out of this economic hole.  Last month, the respected ISM Manufacturing Index climbed to 52.9 from 48.9.  Any reading above 50 indicates that the manufacturing is expanding in the US.  Analysts had expected the reading to only exceed the 50 mark slightly in August.  Many other indicators of factory and industrial health are also finally appearing to show some signs of growth. 

While we breathe a collective sigh of relief that we may have avoided an even greater economic catastrophe, there are still some significant risks on the path to economic recovery.  Like the last two recessions, we are likely looking at a “jobless recovery.”  As long as unemployment remains high, consumers will be unlikely to increase spending, which would help drive the economy out of recession quicker.  Some pundits fear that one of the dramatic effects of this recession is that we may have fundamentally shifted consumer purchasing behaviors.  While saving money and not running up debt is a great personal financial discipline, the same does not necessary hold true for the nation.  Right now, many analysts are cautioning that the current increase in factory activity may be directly tied to replenishing inventories that have been drained over the course of this recession.  If consumer spending does not pick up over the next few quarters, then manufacturing may again slow down with a risk of drawing us back toward recession.

Mortgage rates have faired very well during the last month will little upward movement despite the positive economic news.  It is quite likely that mortgage rates will continue to stay at a fairly low level even as the economy begins to recover, especially if inflationary pressures continue to behave.  Eventually rates will begin to rise again, but probably not until the government begins to slow its purchases of mortgage backed securities.