Coming Soon: The Miraculous Hollow Economy

Economic commentators get excited these days if the typical indicator rises by 1 or 2 percent. What about 132 percent?

That's one credible projection for the increase in total net income for the S&P 500 in the fourth quarter of 2009. In any normal year, income growth of 5 or 6 percent would get analysts excited. But 2009 is not a normal year; it's the year after the Year Wall Street Wrecked the Economy. So compared with the fourth quarter of 2008—when the stock market crashed and the economy flirted with a full-blown depression—results in 2009 are going to look remarkable. "We're going to see some mind-boggling growth rates," says Dirk van Dijk, chief equity strategist for Zacks Investment Research, which is forecasting the 132 percent blastoff.

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For the next several months, in fact, there will be a deluge of economic and financial indicators that are so inflated as to be meaningless. To measure changes in the economy, we often compare the situation today to the way it was a year ago, to filter out seasonal factors like weather and holidays that can lead to big month-to-month fluctuations. Growth in corporate earnings, department store sales, and some measures of home sales are typically calculated based on year-to-year, apple-to-apple comparisons, for example. (Other indicators like GDP, unemployment, and inflation are less seasonal and easier to measure on a month-by-month or quarterly basis.)

The recession developed gradually through most of 2008 until the cataclysms of September, when Lehman Brothers declared bankruptcy, AIG collapsed, Wall Street quaked, and lending virtually stopped. The stock market plunged, housing froze up, and shocked consumers, wondering what kind of catastrophe was happening, basically stopped shopping. For the next six months the economy got dramatically worse, with GDP suffering its biggest contraction since 1958.

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Compared with that wipeout, sales of cars, homes, and retail products for the next six months will make it look like America won the lottery. In terms of earnings, the most startling gains will probably come in the financial sector, which lost an astounding $63 billion in the last three months of 2008. Van Dijk estimates that the profit swing in financials from 2008 to 2009 will account for most of the huge gain in S&P 500 earnings, with the consumer goods sector also showing a big increase. "It's more a statement about how depressed earnings were in the fourth quarter of 2008 than a statement about robust profits in 2009," he says. Overall fourth-quarter earnings will still probably be below the levels of 2007, which included the last couple of months before the recession began.

Overall growth in the economy is likely to be a bit inflated, too, when those numbers are released at the end of October (third-quarter GDP) and next January (fourth quarter of 2009). "Remember, it is the rate of change that is the driving force behind GDP, and the rate of change in a number of GDP components will improve simply because things fell so far," writes analyst Patrick O'Hare of Briefing.com. "In effect, the U.S. economy is destined to improve in the near term on technical factors alone."

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The real economy remains in rough shape, with unemployment likely to stay close to 10 percent for months. Like other economists, Federal Reserve Chairman Ben Bernanke said recently that, in technical terms, the recession is probably over. But he cautioned that "it is still going to feel like a very weak economy for some time." So enjoy those blowout numbers. The occasional mirage of prosperity might be a welcome escape from reality.