There Is No Recovery
We keep hearing talk about whether the recovery is stalling out or even that we've had a strong recovery but the job market is still shaky. In reality there hasn't been any "recovery". What happened was a massive economic shock caused by the vaporization of several trillion dollars of wealth. In the immediate aftermath revenues dropped about 30%. If you've been paying attention to earnings statements, you've noticed that revenues have run about 10% higher than last year. All this means is that we have settled into an economic state where business activity is about 23% lower than it was prior to the crash. The government has been pumping massive amounts of money into the system via deficit spending, zero-interest loans to banks and backstopping housing by purchasing a trillion $ worth of mortgages from Fannie/Freddie.
The question now is can we even sustain the level we're at? Have there been any fundamental improvements that could sustain any real growth in real economic activity? Consumers have barely put a dent in their indebtedness; there's still a huge commercial real estate debt problem; and companies are reportedly hoarding cash rather than spending on development. Now that the $8,000 tax credit is gone, housing is due for another tumble. I get really annoyed when I read or hear about "The Recovery".
The question now is can we even sustain the level we're at? Have there been any fundamental improvements that could sustain any real growth in real economic activity? Consumers have barely put a dent in their indebtedness; there's still a huge commercial real estate debt problem; and companies are reportedly hoarding cash rather than spending on development. Now that the $8,000 tax credit is gone, housing is due for another tumble. I get really annoyed when I read or hear about "The Recovery".
posted by ziel | 6/18/2010 12:47:00 AM
4 Comments:
The "recovery" is slow, but it does exist. A recession created by financial crisis is always tougher than the more typical interest rate-led/over-heating economy recession. It likely will take businesses and individuals another couple of years to get their earnings and debt payment levels, respectively, back to where they were in 2007.
For the past several recessions, unemployment numbers have taken a very long time to drop relative to recessions from the 1950s to 1980s. And given how high unemployment has risen, it will take another five years or so to get unemployment down to 2007 levels, if ever.
That all being said, business activity, shipping, machinery orders, trade figures and many other economic indicators are doing quite well. Indeed, several have equalled or surpassed their 2007 levels.
There is a recovery happening out there for business, though it's very weak in Europe, but that's to be expected. But for individuals, the recovery is simply too week to be felt. Our indicators - unemployment rate, job security, promotions, raises, opportunities, home prices, portfolios - remain abysmal. (Though if you stuck to the plan and rebalanced, your portfolio should have regained most of what was lost.)
The economy is mending, albeit slowly. The question is when - or even possibly whether - that will help regular people. At best, we're in for another year or two of this fun. At worst, the recovery will be too weak and global wage competition too strong to change the current situation much for next decade.
Rail shipping is up over last year but still way below 2008 levels, at least according to Railfax.
I wouldn't be surprised if machinery orders and manufacturing, since it seems our economy has shifted a bit from service to manufacturing, which is good except that manufacturing is now a jobs wasteland - they don't hire anybody anymore. Plants are so automated, and the jobs that exist so specialized to the particular plant and product, that there's little solace for the jobless by an uptick in manufacturing.
I'm sort of apocalyptic by temperament, but I see this less as a recession and more as a fundamental shift in how America and other Western democracies handle (or fail to handle) their economic affairs.
Factors such as the baby boomers heading into retirement, woefully underfunded pension plans (both public and private) and the emergence of a less well-educated, less productive, and more indebted generation entering the workforce are creating long-term problems beyond any government-imposed solution. What's more, there's a huge amount of toxic debt still floating around in the economy, inhibting economic efficency. There's also a glut of housing, much of which the average American family still can't afford. And to top it all off, I think Peak Oil is for real, though exactly where the peak is, I'm not sure. In any event, I think energy costs will rise over time.
Taken all in all, I don't really expect the economy to recover in the sense of going back to the way that things were before. People are adaptable, and will adjust, and I'm not expecting a Mad Max secenario, but I just don't really see the systemic problems in Western economies as being "fixable," except in the sense that that which can't go on forever, eventually doesn't.
On the subject of our economic outlook, I will defer to the great Dr. Paul Craig Roberts - he says we can expect ongoing economic decline, culminating with the United States becoming a Third World nation within a generation.
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