Eurodollar University: Part 1 - Not Green Shoots, Shadow Prices

It is, if you haven’t noticed, that time of year again. ‘Tis the season for green shoots. In the Northern Hemisphere, winter gives way to spring. The flowers start to bloom and humans living here are naturally optimistic for the change of seasons. There is a reason how for ages this time of year has been associated with rebirth.

In raw economic terms, green shoots have become synonymous with the expression “growth scare.” Autumn uncertainty turns into winters of discontent. Unsure what to make of them, people typically go with what they know (or think they know). Economic growth is a given, therefore any negative association must be temporary; dare I say transitory?

This is how it went in 2014-15. Fall ‘14 was ominous not just in the sudden appearance of minus signs but more so because of how shockingly contrary that was from mainstream expectations. It would only get worse at the launch of 2015 before suddenly Spring.

Things seemed to look better without the snow (quite literally, as Economists had by then become infatuated with meteorology). Some actually said it was nice the world had avoided a growth scare. Green shoots abounded.

The most famous, really infamous example was Spring ‘08. The world became familiar with the word subprime in the Fall of ‘07, and then the name Bear Stearns at the end of the harsh Winter of ‘08. It wasn’t until Bernanke in 2009 that the term “green shoots” was actually used, but in those middle months of 2008, it was the prevailing theme nonetheless.

MS. YELLEN. The strong incoming data on spending eased my fears that we are in or are approaching a recession regime of the sort embedded in the last two Greenbooks.

LACKER. On the whole, I think the risk of the national economy sinking into a serious recession has receded, and the growth outlook has edged up a bit. I was relieved by the strength in retail sales in May as well as the upward revisions for April and March. The ISM indexes have steadied at right around 50 over the past four months; and although the labor market has been weak, it has not yet shown the accelerating declines that I feared.

MR. HOENIG. More broadly, turning to the national economy, I have revised up my growth estimate for the first half of 2008, but it has made little change in my longer-run outlook. Compared with the Greenbook, I see somewhat stronger growth in the second half of this year and somewhat weaker growth next year and in 2010. I continue to judge that the potential spillover effects from the financial distress have understandably been overestimated in this Committee’s recent decisions and in Greenbook forecasts in recent months. [emphasis added]

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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