Purchasing managers' surveys for September were encouraging, with further gains in services output and new business offsetting slippage in the corresponding manufacturing indices. A weighted average of services new business and manufacturing new orders is only slightly below its long-term average, supporting hopes of GDP growth of 2% annualised or more during the second half – see first chart. (The rise in the PMI indicator had been foreshadowed by recent better corporate earnings news – see previous post.)

The suggestion that the recovery is being led by services rather than manufacturing – in contrast to widespread expectations of "rebalancing" to be induced by a plunging exchange rate – is supported by the CBI's quarterly surveys of financial services, business and consumer services and manufacturing. The balance of manufacturing firms expressing greater optimism has recovered to the middle of its historical range but the corresponding balances in the two services surveys are at multi-year highs – second chart.

The six biggest bear markets in the Dow Jones industrial average in the 100 years before the October 2007-March 2009 decline were 1973-74, 1937-42, 1929-32, 1919-21, 1909-14 and 1906-07. The 1929-32 fall was by far the largest at 89% while the other five ranged between 45% and 52%. The 2007-09 bear involved a 54% slump. (For reference, the Dow decline over 2000-03 was "only" 38%.)

The chart compares the 2007-09 decline and subsequent recovery with the four peacetime bears, i.e. excluding the 1909-14 and 1937-42 falls, which were influenced in their later stages by the world wars. The peak levels of the Dow were rebased to 100 and the earlier cycles aligned with the October 2007 top.

At the March 2009 low the Dow was much weaker than at the equivalent stage of the 1906-07, 1919-21 and 1973-74 bear markets and was tracking the 1929-32 decline. The recent recovery, however, has moved the index above the four prior cycles.

The 1906-07, 1919-21 and 1973-74 bears were comparable in terms of magnitude and duration and the subsequent recoveries were also broadly similar. A repeat performance in the current cycle would involve the Dow rising to within 5-15% of its October 2007 peak by the end of 2010, implying an index level of 12000-13500.

Some pessimistic commentators draw a comparison between the recent recovery and the failed rally of November 1929-April 1930 – see the rise in the bottom, black line between late 2007 and mid 2008. The Dow climbed 48% versus a recent trough-to-peak increase of 50% before embarking on a further devastating decline.

Even ignoring policy differences, the comparison is dubious because the 1929-30 failed rally began only two months into the bear market and three months into the recession, before the full consequences of the bursting of the prior credit bubble were apparent. The March 2009 bottom, by contrast, followed a long economic and market decline and was characterised by very weak investor expectations.