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W, V, U, L or Z: What Direction Is The Economy Going?

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. 

Posted in: Economic Statistics, economy, Public Policy

1 Comment

  1. Mez

    Hey Buddy,
    happy to see you back again.
    How­ever Iike to see more teeth, these pre­dic­tions are like
    the doc­tors who tell tall par­ents their child will be tall and
    short par­ents not to expect a bas­ket­ball player.…..

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