Seeds of Recovery
By: Dr. Charles Lieberman
Date: 5/18/2009
Economic forecasts tend to be all over the map as the economy goes through an inflection point from recession to recovery. So it is this time, as well. While some hope or project a strong rebound in activity, others forecast no recovery, or a tepid one, at best. To add some spice and variety to the mix, there are forecasts of a double dip recession, an L-shaped recovery, a U-shaped one, and even a W-shaped double dip. One loose end in all of this is that the outcome also depends on future policy initiatives that can have a major impact on the economy's trajectory, not to mention unexpected developments. Most likely, the economy is in the process of bottoming now, with a resumption of modest growth in Q3 that should pick up momentum in the months beyond.
The key to the economic outlook is being able to put together enough increases in spending within key sectors to ignite a self-perpetuating expansion. Housing and inventories are the two obvious candidates for this role, in addition to increased government spending as part of the stimulus package. Housing should resume growth this summer, as population growth absorbs the remaining inventory overhang. As housing becomes scarcer, prices will necessarily rebound above construction costs, enabling builders to sell new construction at a profit. Housing should be a contributor to economic growth by the third quarter.
Inventories have been falling at shocking pace, as large production cuts reduced output, even as consumer spending gained in Q1. (The latest retail sales data suggest that consumer spending might recede slightly in Q2.) But production is so far below sales, that a sizeable rebound in industrial activity is necessary to stop the inventory depletion that is taking place. In the auto sector, sales are below scrap rates. Thus, a rise in production is needed.
The expected rebound in housing construction and industrial production should help stabilize the labor market and lead to some modest increases in employment. Initially, this will be evident as fewer job losses. Rising incomes, reinforced by tax cuts, should enable consumers to increase spending, even if they do so cautiously at first. Better functioning credit markets will also facilitate this rise in consumer spending. In time, these gains will feed off one another and spread through the economy. This process does take some time. But the seeds for recovery have already been sown and the results should be evident in the coming quarters. Download this article in PDF Format
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