Progressive Grocer - January/February 2009 - (Page 94)

Financial insights Deloitte. Don’t yield to fear The shape of the recovery is already recognizable, in the yield curve. By Carl Steidtmann Another stimulus package of at least $500 billion is expected from the incoming Obama Administration. Will any of this work? he economy has been in a recession for a year now. The more recent economic data shows that the pace of decline has accelerated in recent months. Banks are recording ever-larger losses. Jobs are disappearing in almost every industry. Consumers are pulling sharply back on their purse strings. Since the bankruptcy of Lehman Brothers in September, the economy has shifted from a mild recession to a freefall. Some of the funds listed above will undoubtedly be misappropriated; some may actually be counterproductive. Nonetheless, we have never seen the kind of monetary and fiscal stimulus that is currently being put into the economy fail to spur a recovery. Indeed, you can already see the shape of that recovery in the yield curve. The yield curve is a proxy for bank margins. When banks can make money In this environment, risk spreads have reached record highs. Investors have on the spreads, they lend. Credit creation generates growth. A steep yield curve rushed to the safety of Treasury bills, sending yields down to levels not seen means fat margins, and an incentive to lend. The chart on this page shows the yield since the early 1930s. Banks are much more concerned about their return curve for 1999-2002, and the current yield curve starting in July 2005. of investment than their return on The curve generally leads the economy investment. by 12 to 18 months, as the banking system U.S. Treasury yield curve: 10-year bond less three-month T-bill yield The Fed has responded to this situaresponds to changing incentives. In the tion by aggressively cutting interest rates, 2001 recession (the orange line), the curve 4.0 and by flooding the banking system with inverts in July 2000, and the recession 3.5 Jul. 1, 2005-2008 reserves. Bank reserves are up more than started in March 2001, when the curve 3.0 1999-2002 230 percent from a year ago, representbegins to revert, a nine-month lead. 2.5 ing an unprecedented surge in liquidity. There’s some debate in economic cir2.0 And still the banks hoard their cash. cles about the correct dating of that recovIn such an environment of fear, nothery. The NBER puts the recovery date at 1.5 ing can be more beneficial than a fearless November 2001. The problem with that 1.0 Central Bank and Treasury. When no one date is that three (industrial production, 0.5 else will lend, the public sector needs to employment, and real income) of the four 0.0 step in and act as the lender of last resort. variables it looks at continued to decline This the Federal Reserve and Treauntil March 2003, and the yield curve -0.5 sury have done with a vengeance. Over peaks in March 2002, a year before that -1.0 the past year, the Fed has created an recovery date. 1999 2000 2001 2002 alphabet soup of special lending facilFor this cycle, the curve inverted in Source: U.S. Federal Reserve ities. Credit has been extended to comMarch 2006, and the credit crisis hit 17 mercial banks and investment banks. months later, in August 2007, which some The Fed has purchased commercial paper and taken mortgage-backed economists believe to be the start of this recession. The actual start of the recession, securities as collateral. The FDIC has extended guarantees to all bank however, took until December, a long 21 months from the original inversion. deposits and money market funds. The Treasury has set up the Troubled We are just now hitting the peak of the steepening of the curve, which would Asset Relief Program with $700 billion in funding. The Federal Hous- put recovery a year from now, sometime in the fourth quarter of 2009. This is a ing Authority has the HOPE project little bit like looking at tea leaves, and none of it is an exact science. But the best More ONLINE to assist distressed homeowners. leading indicator of the economy is forecasting a recovery for late 2009. Collectively these efforts have put For more more than $1.8 trillion into the econ- Carl Steidtmann, chief economist for New York-based Deloitte Research, is a financial stories, go to omy, with another $2.6 trillion in funds recognized expert on economic forecasting of retail sales activity, consumer trends, Progressivegrocer.com waiting to be deployed if needed. and general economic conditions. A H E A D O F W H AT ’ S N E X T www.progressivegrocer.com T 94 • Progressive Grocer • January/February 2009 http://www.progressivegrocer.com http://www.progressivegrocer.com

Table of Contents for the Digital Edition of Progressive Grocer - January/February 2009

Progressive Grocer - January/February 2009
Front End: Aldi’s Private Label Showing its Fitness
Nielsen’s Shelf Stoppers/Spotlight: Prepared Foods-DryMixes/Rice Mixes
Market Snapshot: Minneapolis-St. Paul, Minn.
Outstanding Independents Awards: Up with People
Current Events: Retail Newsmakers
Contents
Lempert Report: The Phoenix Format Face-Off
Independents Report: Making your Workplace Family-Friendly
Multicultural Marketing: Where there’s Mystery, there’s Margin
Wake-Up Call: New Habits Die Hard
Beverage Alcohol: Wine 101
Soft Drinks: Creating a Buzz
Whole Grains: The Brown Version
Packaging: The Whole Package
Meat: Master Beef Backer
Pet Care: Financing Fido
Executive Insight Series: Technology and the Independent Grocer: Eye of the Gale
Equipment Case Studies: Food. Service. Equipment
Financial Insights: What the Yield Curve Shows
What’s Next: Editors’ Picks for Innovative Products

Progressive Grocer - January/February 2009