Let the Recovery Begin
The recession appears to have reached its nadir or close to it and a recovery is soon to follow. The current recession has shed 3.7% of GDP since the end of 2007 equaling the 1957-58 recession as the deepest downturn since the Great Depression. As with most serious financial disruptions, the pessimist and those that wanted TV airtime were prognosticating another depression. This recession fell far short of that.
The Current Crisis vs. The Great Depression
|Current Crisis||The Great Depression|
The Federal Reserve Bank of San Francisco
While we are not out of the woods yet, it is time to start contemplating what the recovery will look like. I believe that it will share an important characteristic of the 2001 post dot-com recovery or “The Jobless Recovery”. The movement of jobs to low cost countries will continue, rising health care cost and the uncertainty of health care reform will discourage employers from hiring. Low cost countries will maintain a competitive advantage in labor, raw materials and energy costs for the foreseeable future. Green initiatives like renewable energy sources and “cap and trade” will have an associated cost of doing business in most economically developed countries and exacerbate the situation.
Corporations will attempt to reduce domestic labor cost by replacing jobs with technology where they cannot be exported. The net effect will be a continued reduction in the traditional manufacturing base over time. New jobs in technology and the green economy will develop more slowly than manufacturing jobs in prior recoveries. Unemployment at the end of the 2nd quarter was at 9.3% while Okun’s Law would suggest it should be at 8.6%. Fewer of the unemployed are on temporary layoff than in prior recoveries. The disastrous budget problems in state and local governments will also reduce the stabilizing effect of public sector employment.
On the other hand, the long duration of the current downturn has resulted in an extraordinary level of pent up consumer demand. Typically, the longer the recession, the bigger the bounce in the early stages of recovery. In the case of our current crisis, that may be mitigated by the extent of the trauma to the financial system and banks reluctance to take on risk. My guess is that as in previous asset bubble bursts, memories are short lived and the pursuit of profit will once again reign supreme in short order.
Longer term, spending initiatives by the current administration on top of the prior administration’s reckless spending, and stimulus spending programs that evolve into permanent government programs will establish long-term record deficits. While some Fed officials say there is no empirical evidence of a link between government deficits and inflation, at the very least this will bid up the cost of money in the future. Economists have warned throughout my adult life that our current account deficit was unsustainable and that life as we know it would change as a result. It has not happened yet, so I will leave the prospect open that government deficits can also go on forever without recourse.
Therefore, with any luck, we are moving into the next cycle. I, for one, will be trying my darnedest to identify the next area of speculative excess and get in and out early. There will be one, if not tulips bulbs, dot-coms or real estate, something else that triggers an irrational speculative spark.