Tuesday, July 21, 2009

When does the economy start to recover on its own?

I got a good comment to my previous economic post and replied to it. The reply grew into what I think is worth another post of its own, so here it is. First, the comment.
Slice said...

The economy has to recover at some stage. Most likely towards the end of the year.
I agree with the first half of Slice's statement. But the second - recover by itself when?

The Depression lasted a decade until war spending was big enough at last to shake the economy loose. Japan's doldrums lasted at least a decade and they never fully recovered because so many competitors had popped up and Japan never made the necessary fundamental changed in their economy.

Right now I still see no reliable indication that the economy itself is trying to recover. It remains on life support based on government spending.

The economy itself will not recover until the consumers (70% of GDP)start spending again, and to do that they have to have more jobs, better pay, and less employment uncertainty. Right now all of these things are going the wrong direction.If consumers don't start spending, then investors will not invest in putting unused plant and equipment back into use because their is no market for the product.

Since investment is locked to consumption and lags behind it, there remain international trade and government spending. But international trade is still trending down, particularly since the Buy American actions are causing other nations to retaliate. That leaves only government spending to support the economy. It's all we have right now, and it's not enough to fund a recovery. All it has done is slow the collapse into what very probably was Depression II (if you don't count the Great Depression of the 1870's.)

Jobs and payrolls are the key. They are still trending in the wrong direction for the economy to help itself any time soon. It won't be this year. The lag time on creating new jobs, hiring and making masses of consumers feel secure enough to start spending again is at least a year from now, probably more.

Addendum 3:14 PM
For an additional view of how long it will take to recover, the excellent blog Calculated Risk offers two strong views that the worst is not yet over.
  1. Feldstein: Risk of Double Dip and
  2. Philly Fed State Coincident Indicators: Widespread Recession in June
I trust both Martin Feldstein and the Philly Fed a lot more than I do the politically motivated anti-Obama Associated Press and their hand-picked hatchet woman, Nedra Pickler.

The difference between the Philly Fed and Marty Feldstein is that both of those are primarily analysts trying to understand what is actually happening. The AP and Nedra Pickler are both political advocates in the business of swaying public opinion, and they merely hide behind the Associated Press's long history as a relatively objective news source.

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