Green Shoots
- Posted by ryan on April 30th, 2009 filed in Economics
Let’s check in on the economy, shall we? Yesterday’s output report was the source of plenty of hand-wringing; the extremely bearish Duncan Black wrote, for instance, “I don’t think people really get how bad this is getting….”. I don’t think that’s at all the right way to think about this. For one thing, the number was not a surprise. It’s been clear to me for a while that we were going to get a decline between 6% and 7%. If people weren’t expecting such a figure, then they weren’t paying attention.
It’s also not really appropriate to talk about the first quarter report in the present tense. Tomorrow is May, and the horrible first quarter primarily reflected the really, really horrible January and February with which we began the year. There were green shoots in March, and they’ve grown in number and confidence in April. Best not to ignore the positive signs.
Why do I feel pretty good about things? Recessions end. They always do. Barry Eichengreen is pitching a future economics built on empiricism; in that spirit, I point to all the other recessions we’ve had, and to the fact that they ended. The initial shock to the economy was substantial — similar in magnitude to the beginning of the Depression — but the policy response has been good. We had to work very, very hard to keep the Depression going so long, and we haven’t duplicated the mistakes made in the 1930s. This is now the longest postwar recession that we’ve ever had, and based on how aggressively the world has pursued monetary and fiscal stimulus, it’s about time for it to start wrapping up.
There are indications that this is happening. February’s Case-Shiller data showed a moderation in the decline in home prices. I fully expect that in March or April, we will see an end to declines in some markets, which will be important psychologically. Other markets will continue to see drops for the foreseeable future, the segmentation of the national housing bust into a handful of regional busts is key to beginning recovery.
Jobless claims continue to look bad, but they’re also signalling that we’re approaching the bottom. The four-week moving average is just over 20,000 below its peak, which signals that more likely than not that peak was the cycle peak.
And there was good news embedded in the GDP report. Personal consumption — a leading indicator of recovery — looked good. The decline in production has been so substantial that any uptick in demand will mean new production is necessary — which will mean new hiring. And we have only just seen the very beginning of the impact of stimulus.
Threats remain. Any unforseen shock could get things deteriorating again (and there’s an outside chance that a flu pandemic could be such a shock). It’s also true that a bottom does not mean an end to pain. Recovery will take a long time, and unemployment will remain high well into recovery. But we are nearing a bottom, which is a very, very good thing. There are still a lot of people out there spinning narratives of utter hopelessness, and that strikes me as completely out of step with the changing situation on the ground.
April 30th, 2009 at 5:49 pm
Agreed, although I’m a little worried about the consumer-led U.S. recovery. If the improvement means we’re getting back to negative savings, this is going to be one brief relief.
May 1st, 2009 at 1:41 pm
We won’t know where the bottom is until at least a year past it. Anything else is wishful thinking. There WILL be unforeseen shocks. That said, creatively visuaizing a healthy economy certainly can’t hurt.
May 1st, 2009 at 1:52 pm
What are derivatives?Whats that market worth?
May 2nd, 2009 at 7:22 pm
Remember that after the Great Crash of 1929, there were bank runs in 1930 AND bank runs in 1931 AND bank runs in 1932. A policy intervention in 1930 that started some modest stimulus combined with just stalling bank runs for a year or so would have meant a shorter recession in the 1929 recession, the first of the two Great Depression recessions.
May 4th, 2009 at 4:13 pm
Recessions end, but in recent cycles, each recovery has been slower than the last to create new jobs to replace those lost on the downswing. Is there any reason to believe this one will break the trend?
And then there’s the deeper worry that the world is going to replicate Japan’s “lost decade.” Sure, the recession will end, but when it does, do we get vigorous growth once again, or does the economy just kinda twiddle its thumbs?
Finally, there’s the question of how much of the U.S.’ revitalized productivity growth over the past decade or so was happening in the financial ‘industry’ itself. If we didn’t really have that much REAL productivity gain back when things were humming, why should things be any better after the recession ends?