Almost every day I am asked about the economic recovery and whether or not it is sustainable.
People ask because there is a constant barrage of economic predictions by economists that pretend that they know what will happen in the future even thought they still can’t figure out what happened in the past. Listening to economists and TV talking heads it’s clear that while everyone has an opinion, no one really knows if the recovery will take the form of a “W”, “V”, “U”, “V” or “Z” (I am not really sure what a “Z” recovery is but some really confusing economists are predicting it).
This time around almost all of the TV pundits are going be able to claim that they are the economic Nostradamus of our time because sooner or later graphs of economic growth are going to have the profile of most, if not all, of the letters of the alphabet. For the foreseeable future, economic growth is going to be volatile and somewhat random and almost every prediction will be right.
There is going to be a level of randomness to the growth trajectory of the economy as it inevitably grows, then grows at a slower pace, then grows at a faster pace, then shrinks a little, and then grows again. Unfortunately, given the seriousness of the economy’s problems, I think it will be a while before the U.S. is back on a sustainable high growth trajectory that is sustainable (thereby making the L crowd right as well).
So, like a Rorschach Test, for the next few years there will be something for everyone in the economic statistics.
The U.S. economy is starting to bounce back because of the positive cumulative effects of (i) an inventory rebuilding cycle (i.e., production of new inventory is rising because inventory stocks in many industries are depleted and need to be replenished), (ii) a lot of fiscal and monetary stimuli and (iii) productivity growth (one tiny, positive side effect of layoffs). The bounce from inventory restocking will be temporary and, as a result, if all other things remain constant, growth will taper off to a much slower pace late in the 4th quarter of 2009 and early in the 1st quarter of 2010. Growth may even turn negative again for a few months early in 2010. Unfortunately, sustainable growth needs durable demand and demand growth isn’t in our immediate future. But, then again, neither is a deep second stage to the recession.
There are many national and global variables that can radically change the trajectory of the economy and make my prediction wrong. For example, I don’t know what government policy will be and whether or not Congress and the Administration will make mistakes that hurt us. I am assuming a continuation of current fiscal and monetary policy. And, I certainly can’t predict world events, like wars, natural disasters and pandemics, which dramatically change our economic future.
However, while the short term outlook is cloudy, there are three economic forecasting “truisms” that suggest the next generation of American’s will be better off than the current generation and sooner or later the U.S. economy will be fine. These truisms have been correct for my entire life and I don’t see a change in the foreseeable future. So, not only will the U.S. economy be larger at the peak of the next business cycle but per capita GDP (a measure of how wealthy each citizen is) will be greater as well.
- Truism #1 – The Population Of The United States Grows Every Year. The U.S. is a big country and every year its population grows by a little less than 3 million people (about 1%). The additional population creates new incremental demand for goods and services which provides an upward bias to economic growth.
- Truism #2 – Productivity Increases Over Time. Productivity measures the average amount of goods and services that each American produces and that amount tends to increase over time because of advances in technology and innovation. Such productivity increases make us all “wealthier” over time and, on average, improves the standard of living.
- Truism #3 – On A Regular Basis “Bad Stuff” Happens In Other Countries But Not In The U.S. Which Reinforces America’s Position As A Stable Economic Superpower. The political system in the U.S. is the most stable in the world. Compared to other countries (particularly emerging economies and the BRIC nations), the U.S. has less graft, a better and more responsive judiciary and lower levels of cronyism. Since the U.S. is geographically isolated, the spillover effects of war, bad political leadership or despotic regimes tend to be lower in the U.S. than other places. Our position as a bastion of consistency is a national asset that made the U.S. a better place for business than anywhere else in the world over the last 100 years.
While I think that the economy will grow over time, for the next 12 to 18 months, growth will be uneven (i.e., spurts and slowdowns) but, on balance, relatively anemic. Unfortunately, the hangover from the debt boom will take some time to get over. But, over time there is no place better for business than the U.S. and the future remains bright for future generations of Americans.