Thursday, October 01, 2009

"After the Storm": No Immaculate Recovery

by Calculated Risk on 10/01/2009 10:44:00 PM

A couple late night articles:

The Ylan Mui at the WaPo reviews the recent economic data: New Economic Reports Show We're Still Hurting (ht Ann)

The fragile economic recovery has relied heavily on government stimulus spending, but new data show that as the money runs out, a sustained rebound may be elusive.
A similar theme from The Economist: After the storm
Despite a welcome return to growth, the world economy is far from returning to “normal” activity. Unemployment is still rising and much manufacturing capacity remains idle. Many of the sources of today’s growth are temporary and precarious. The rebuilding of inventories will not boost firms’ output for long. Across the globe spending is being driven by government largesse, not animal spirits. Massive fiscal and monetary stimulus is cushioning the damage to households’ and banks’ balance-sheets, but the underlying problems remain. In America and other former bubble economies, household debts are worryingly high, and banks need to bolster their capital. That suggests consumer spending will be lower and the cost of capital higher than before the crunch. The world economy may see a few quarters of respectable growth, but it will not bounce back to where it would have been had the crisis never happened.
Recoveries are usually led by a pickup in consumer spending and residential investment. Although consumer spending was strong in August, the numbers were distorted by the cash-for-clunkers program, and I expect weak growth for consumer spending through most of next year as households save more and rebuild their balance sheets.

And for residential investment, there is still too much excess existing home inventory, and possibly a large shadow inventory. I will write more on the outlook for consumer spending and residential investment soon.

As The Economists notes, rebuilding inventories will be a transitory boost for the economy, and that leaves government spending and exports. That doesn't sound like an Immaculate Recovery.