'Green shoots' or just weeds?

By Matthew Lynn

Spring has arrived, and everyone is fed up with talking about the greatest recession since the 1930s. So now there are "green shoots" everywhere.

On one day last week, Bloomberg News carried 118 articles and research reports in which the most durable of horticultural metaphors was deployed.

"I do indeed see 'green shoots' for the European economy," Ewald Nowotny, a council member of the European Central Bank, said at a press conference in Vienna last week.

"We're beginning to see some healthy signs - the stirrings of what I call 'green shoots,' " Richard Fisher, president of the Dallas Fed, said last month.

Over the next few months, you are going to hear a series of increasingly ridiculous signals of recovery heralded as the end of the recession. All will be meaningless.

Here's a fool's guide to "green shoots" to be ignored by anyone trying to work out where the economy is going:

It's no longer getting worse.

"The economy has continued to contract, though the pace of contraction appears to be somewhat slower," the Federal Reserve's Open Market Committee said in a statement last week, in which it signaled that - you guessed it - the emergence of all those "green shoots" meant it didn't have to do much more to stimulate the economy.

So, to get this straight, the economy is still falling off a cliff, only not quite so fast as it was a few months ago. It is, however, still getting smaller, which means everyone is getting poorer. At the risk of spoiling everyone's fun, there is a big difference between that and actually recovering.

We applied the medicine, so stop complaining.

"I am confident that the innovative policies being pursued by the Federal Reserve will facilitate and, indeed, expedite the recovery process," the Fed's Fisher said. It's pretty much the message pumped out by central bankers around the world: We have cut interest rates, printed money, and pumped up demand. We have a computer in the basement that says that, when you do those things, the economy will start to recover.

There is just one snag: What if you have the wrong diagnosis and the wrong cure? Just applying the medicine doesn't tell us the patient is about to get up and start walking again.

The stock market says so.

Indeed it does. The markets aren't spotting "green shoots" so much as a whole flowerbed.

Europe's Dow Jones Stoxx 600 Index has erased all of its losses from earlier in the year. It climbed 13 percent in April, the biggest monthly gain since data for the index started in 1987. Most other major markets have staged similar rallies. "All the things are in place for the bear market to have ended," said Anthony Bolton, president of investments at Fidelity International.

Again, there's a snag: The market doesn't know any more than the rest of us. It has predicted at least 12 of the last two recoveries and nine of the last five recessions, to paraphrase economist Paul Samuelson.

One consequence of the credit crunch is that we should stop believing the markets are good at predicting anything. After all, they didn't see the blow-up in the markets, and that was happening right under the noses of professional investors. There's no point in imagining the same people can now spot a recovery.

Business leaders are more optimistic.

Some of the most respected names in business are blooming with confidence. Those "green shoots" are "turning into daffodils," Goldman Sachs' chief economist, Jim O'Neill, said last week.

Consumers want to "move on" from the economic decline, said Stuart Rose, CEO of U.K. retailer Marks & Spencer Group, as if the recession were a psychological condition we could just snap out of.

Business leaders are perennially optimistic. It's part of their job. To get to the top of a big company, you have to be constantly "breaking new ground," "pushing the envelope," and "taking things to the next level." The gloomy realists don't make it to the board.

The reality is that no one knows where the economy is going. This is the worst recession since World War II, but much has changed since then. It's time those "green shoots" were nipped in the bud. To deploy a metaphor from a different part of the garden, we're not out of the woods yet. And we won't be for a long time.

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