There is an old joke floating around that if you ask two economists to comment on the state of the economy, you will receive three answers back. This is really no different than how people feel about the market increase of the last five months.

Everyone can understand the concept that when a basketball is dropped from head height, it will bounce part of the way back up. Some investors are thinking the same about the world’s markets. The decreases were so swift and severe in October and November 2008 that many figured that the only way to go was up. There were many quality companies with solid earnings that were unfairly devalued because of the economic crisis. Eventually these companies were going to move back into favor, and their share price increase with demand. Is this why the world markets have gone on a tremendous run since March 10th of this year, or is the recession over?

Looking from the market rebound side, there is a lot of data showing that the economy is far from recovered. One key indicator is inflation and it is hard to imagine the Bank of Canada will be overly concerned with it anytime soon. Recent economic data from Statistics Canada paint a fairly ugly picture of the Canadian economy. Unemployment is sitting quite high and increasing monthly. Business investment is down. Exports are down. Housing starts are far off 2008 figures. However, the core CPI (consumer pricing index) has recently increased 1.9% over the previous period.

If you want to believe that the economy is recovering, then you will be happy to hear that the Bank of Canada sees a quarter-over-quarter GDP (gross domestic product) growth of 1.3% in the third quarter, compared with its previous call of a 1% decline. If the recent market surge only lasted six to eight weeks, then there definitely would be reason to be pessimistic. The markets are entering the sixth month since the low point was hit. June was the only month where market growth was not more than two percent.

Any way you look at it, there have been a number of positive signs that the worst is over from one of the most severe recessions in the last eighty years. Only time will tell if we are fully on the road to economic recovery.

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September 9, 2009