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Popular Economics Weekly

We might have a merrier Christmas than was thought even one month ago. October’s retail sales surged 1.4 percent, which means that consumers may have decided to unleash their pocket books for the holiday season. This, and several other economic indicators should give the pessimists pause. The recession is over, and those businesses will profit from it that are also willing to spend again on expanding their production of goods and services.

Even BusinessWeek in jumping on the bandwagon. It projects that businesses will begin to hire and payrolls stabilize over the next couple of months with more than 80 percent of S&P 500 index companies exceeding estimated earnings in Q3. Corporate profits have as much as tripled over 2008 for the likes of JP Morgan Chase, Travelers Insurance, and a handful of S&P 500 members.

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What was remarkable about the retail sales figure was that sales were led by a rebound in auto sales from a post-clunkers slump, said Commerce Department. This means the auto industry is recovering. Even GM said that it could begin to pay back some of the $50B billion it had borrowed from the Treasury.

Firing on all cylinders after selling or killing off its stale assets before its emergence from bankruptcy, a revitalized GM will look to pay off the extra $6.7B USD that the government loaned it during the bankruptcy process.  According to both The Detroit News and The Washington Post, GM’s board of directors and the U.S. Treasury have agreed on a repayment plan that would involve GM paying $1B USD per quarter, starting on December 31.

Also, Single-family starts were at 476 thousand (SAAR) in October, down 6.8 percent from the revised September rate, but 33 percent above the record low in January and February (357 thousand). Just like for total starts, single-family starts have been at this level for five months, in part because the government is paying first-time buyers as much as $8,000 to buy a home. But any further improvement will depend on a drop in the vacancy rates, which are at a historical high

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We have another indicator of a “V” shaped recovery, if one looks at a history of industrial production. It shows that in the severest recessions industrial production tends to have the highest bounce back. This recession mirrors the worst—in 1948, ‘54, ‘58, ‘74, and 1981. So those expecting a "V" shaped recovery would expect industrial production to be tracking at or above the "severe recessions" line (since this was the worst recession since the Depression), according to the Calculated Risk Blog.

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A quicker recovery also seems more likely because exports, a large part of industrial production, should continue to grow due to the cheap dollar exchange rate. Real exports of goods and services (after inflation) increased 14.7 percent in the third quarter GDP report, vs. a 4.1 percent decrease in the second quarter.

A merry Christmas depends on merry consumers who are in a spending mood. Third quarter real personal consumption increased 3.4 percent, in line with the jump in GDP growth, but much of it was also auto sales due to the cash for clunkers program. The good news from the latest retail report is that auto sales have picked up even after expiration of the cash for clunkers program, showing that consumers want a Merry Christmas.

Harlan Green © 2009