If indeed the worst is over, the combined fiscal and monetary response will have had a lot to do with this relatively quick recovery. The Fed has been cutting rates since September 2007 and has not hesitated to make both large cuts and in quick succession when the data warranted such action. The US Congress managed to pass a fiscal stimulus package in a relatively short span of time, which should start putting money in consumers' pockets during the second half of 2008. With a view to reviving moribund credit markets, the Fed expanded the range of securities that it would accept as collateral, which appears to have provided some comfort to investors that markets for such securities would not disappear. This commitment was put to good use in the acquisition of Bear Stearns by JP Morgan Chase. Confidence is the first step in re-activating markets and, while the activity itself may take some time to pick up, the re-assurance that the Fed's actions have provided facilitates the revival.
This is not to say that everything is back to normal. A number of threats loom. Interest spreads are still large, signalling continuing nervousness. The housing sector, which has been at the centre of the growth slowdown, is not showing any signs of revival. Home prices are still falling and housing starts are still declining. Even as lower interest rates ease the burden of repayment on homeowners, persistent declines in prices tilt the scales in favour of continuing defaults, which then exacerbate the problem. Lots of empty old houses do not encourage the building of new ones. Most importantly, oil prices are at historic highs despite the recent slowdown in growth and there is no relief in sight. This may hurt consumer spending, not allowing it to provide full support to demand in the economy, which then could nip the recovery in the bud. Overall, though, going beyond the facts, there appears to be a distinct change in the mood. And that, echoing Lord Keynes' reference to animal spirits, is ultimately what the business cycle hinges on.