Yes. Recession means that GDP goes downward instead of upward. It was still going downward at a 1% annual rate in the 2nd quarter - but we aren't in the second quarter any more, we are already in the 3rd. The third will come in marginally positive. That's the bottom. The 4th will clearly be growth, not continued contraction.
Does that mean GDP instantly goes back to what it was before the slide? No, but words mean things, and that is not what the term "recession" means. The slide practically stopped even in the 2nd quarter and it is still improving, relatively speaking. So we know pretty well that the 3rd quarter will come in positive or narrowly flat, at worst.
Do you have any idea what is going on in commercial real estate right now?
Sure. It isn't exactly the largest sector of the economy, however, and all of the banks are back to profitability, so there is no great danger to worry about there.
Have you heard anything about the municipal bond market?
Kind of a silly question. It's fine. California is the only large worry out there.
"competent actions of the Fed?"
Yes, the Fed acted with competence and professionalism from the Lehman failure (exclusive - that was a treasury-directed mistake of epic proportions, listening to libertarian puritans) to the March lows, and in doing so it healed the money markets and then the bond market. That restored solvency to US corporations generally and (along with TARP) the banks in particular. That in turn means no more major bank failures are in the offing, nor any great slide. They kept the general price level from collapsing as asset and commodity prices did, avoiding a broad deflation. That saved us any longer depression rerun, as the market (somewhat irrationally) feared last fall.
And yes, bank bailouts, which were necessary. TARP, the second round of Citi, the Merrill backstop for Bank of America, etc. The major failures stopped with AIG. There was nothing fated about that, it could have cascaded through half a dozen huge firms of similar or larger size, and if that had happened it would have brought down half the country, financially speaking. That was nicely avoided.
The economy will recover this year, on automatic fiscal stabilizers (e.g. Federal tax collections have fallen 18% overall, while spending of course rose) and on large scale monetary stimulus from the Fed, on lower import and commodity prices and improved terms of trade (just the oil cost changes are worth 2% of GDP), finance is improved by wider rate spreads -which required healing the money markets (3 month LIBOR at 0.5% not 5%), corporations can borrow again (half a trillion refinanced and a quarter trillion net new issuance; last fall the market was closed with rates at penalty levels and top grade bond traded at 50-60 cents on the dollar); the trade deficit has been cut in half as the savings rate soared from 0 to 7% of personal income; personal income was maintained, despite unemployment, by the fiscal stabilizers above (lower taxes etc).
The banks are now fine, no they are not "zombies". They ave very heavily reserved overall, in no category of loan beyond the original subprimes have loan losses exceeded the rates charged on them; net interest margins are 3.25% on low funding costs (it is CD savers who "pay" in lost income when men do not repay their debts), mortgage securities have rallied 20-30 points from their March lows, all the banks have been able to raise capital again, the bond market has put in an epic rally and stocks are also pointing to recovery (perhaps too far too soon, in fact, in the case of the last).
And no, I don't need consumer sentiment or spending anything to save anything. All of the factors above will restore ordinary growth in a very short period of time. In addition, producer prices are lower 4.5% while consumer prices are lower 1% - commodity prices are lower 38%. That will show up as higher margins for corporate profits. Inventory ran off - production fell even more than sales in 4Q 2008 and 1Q 2009 - and is as lean as its ever been, which will not repeat. Even without restocking, that will add to GDP near-term when it stops. Similarly with the soaring savings rate. It might need to go clear to 10%, but as soon as it stops soaring, GDP kicks up several percent in annual rate.
Americans are now saving $850 billion a year of their own net new capital. The value of existing assets stopped falling in March. The government is adding several trillion in debt to its sheet, all of which must appear as an asset on the sheet of a corporation or a household. So the balance sheets are being repaired, at since March at quite a clip, too.
Do you realize that personal income didn't even fall? Investment did, and the government budget swung to wide deficit. But personal income held up despite the huge jump in unemployment. It just all went to savings. It needed to, surely. All that was required to restore a savings rate was to cut off the deadbeats from access to credit.
Meanwhile there are $750 billion in excess reserves in the banking system. The banks are currently capital-constrained, not reserve constrained, so loan growth is slow. And in this state of the economy is should be - the banks are paying more attention to credit quality etc. But that will not last forever. As their capital recovers and other asset prices move upward instead of downward, they will lend and they were find people who want to borrow.
We aren't wealthy because of any kind of scam. We are wealthy because we adapt to new conditions and new configurations of prices, we face realities, and we work. None of that has changed and none of it is going to change.
The government is being dumb on the tax side, surely. We can easily cut the recovery in half, and we can easily be left with outsized deficits for too long. But simply getting back to the ordinary condition of a growing rather than a contracting economy, we have already accomplished. We did everything that needed doing *policy wise* for that, last year. These things just take 6-12 months to have any effect.
She's a big ship...