Economic Recovery Will Be Lethargic
The climb out of recession will be rocky and tedious but it's unlikely we'll fall to previous lows.
By Jerome Idaszak, Associate Editor, The Kiplinger Letter
June 29, 2009
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What are the odds of a double-dip recession? Relatively low, though we can’t rule it out.
The economic pluses outweigh the minuses. Consumers are now showing a willingness to spend, despite high debt levels and rising foreclosure rates. Their long-term history suggests they’ll keep it up.
Consumer confidence, rebounding smartly, will keep improving, helped by a 25% drop in gas prices after mid-July. “I don’t think the world economy is strong enough so that this runup in energy prices is going to last long,” says Lyle Gramley, senior economic adviser with the Soleil Securities Group.
The biggest economic woes are behind us:
- Banking. Some banks are raising capital and paying back taxpayers as credit markets recover. Lending remains limited but is beginning to revive.
- Autos. Painful decisions have been made. The industry can now start to reinvent itself.
- Inventories. Firms have cut to the bone. As consumer demand picks up, so will production. That’ll boost gross domestic product (GDP) and eventually employment.
- Home sales. They’re climbing, albeit slowly, and a bottom in prices is six to nine months away in the hardest-hit markets. Housing will add a point to GDP growth in 2010, after subtracting a point in each of the previous three years.
- Exports. They’ll rise, boosting the bottom lines of companies that sell overseas.
Still, the recovery will be lethargic. Expect subpar growth of only about 2% in 2010 and a bit more in 2011, well below growth after other deep recessions since World War II. Plus any financial or geopolitical shock to the system could easily derail a recovery. Even without a shock…a fragile economy, grappling with several recession hangovers:
Making it a challenge to build momentum for growth:
- Unemployment. It won’t start coming down until the second half of 2010, after peaking at well over 10%. That won’t feel like a recovery to many workers.
- Commercial real estate. The difficulties started last year, but the dive has gotten steeper. There’s a ripple effect, creating problems for many. As more leases expire, renters will demand big discounts to stay where they are. And new construction will stay mired in the doldrums.
- State fiscal crises. Lawmakers will struggle with budgets, raising taxes and laying off workers. That’ll slow spending by consumers and businesses. The stimulus helped some, but not enough to get states out of their fiscal binds.
- Business investment. It will shrink in 2010’s first half. Companies will move cautiously, delaying major projects until they see stronger GDP growth. That may take a while.
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Reader Comments (12)
Posted by: Rodrigo C. at 06/29/2009 10:19:56 AM
Jerome Idaszak, how can you write two different scenarios within 2 weeks. You are contradicting youself and you lose credibility. On June 17th you wrote "The problem is that oil is going to spike over the next couple of months, to about $85 a barrel by mid-July, pushing gasoline to about $3 a gallon"... 2 weeks later you change that to "Consumer confidence, rebounding smartly, will keep improving, helped by a 25% drop in gas prices after mid-July."... you have to stick with what you say every time or your readers will start questioning your predictions.
Posted by: Dr. Joe Stephens at 06/29/2009 10:26:52 AM
Recovery???????? You have to be joking to think that...! Between the media and the government all you here on tv and all you read on any buisness web site is things are turning around and getting better. What a bunch of lies. These people make believe everything is ok but the reality is were actually headed for a depression in the next few years. Trust me folks, don't spend your money, things are going to get real bad. Let them brainwash the dummies out there. Remember one thing, the buisness channels on tv have one interest, thats to protect wall street. This is why your 401k is now a 201k! The stock market has about a 40% chance of seeing a crash between now and october of 2010. I hope you all listen to me and not what they want you to believe. I have been studying economics for 58 years, get ready for depression #2.
Posted by: Bob at 06/29/2009 11:18:46 AM
I'd like to share this article's optimism but being a realist I found a number of items left out. While Obama and Congress talk about stimulus and reform, they back down(compromise) whenever any powerful interests feel their pots of gold being threatened. Between stepped up outsourcing and the continued influx of illegal workers and unneeded H-1b visas, displaced American workers will be lucky to find any good jobs with benefits. On top of that,two more 800 pound gorillas haven't even entered the room yet. Skyrocketing State and local taxes to keep the States afloat who were already bankrupt before the recession and a coming universal healthcare plan which ultimately will leave the healthcare industry's pots of gold untouched while dumping the cost of expanded coverage right back on the taxpayers who can't even afford their own personal debts. Whether you are optimistic or pessimistic about this economy, reality always wins.
Posted by: w. harris at 06/29/2009 01:46:31 PM
one wonders, other than the ra-ra of it all, what is behind this forecast. Even Buffet, who argueably has more reason to ra-ra than most, sees no green shoots. Indeed, he sees things getting worse before they get better and the downward spiral of commercial real estate and its impact on the insurance industry hasn't unfolded in its entirety yet. There is as much liklihood that ALL of the capital brought into bank balance sheets will get wiped out by six months of losses - both consumer and commercial. We will be back to where we were OH YES, but for one thing. The Federal Government cannot borrow endlessly and the Fed Res cannot print endlessly. The consequences of our irresponsibility haven't been paid yet. I wish it weren't so but I can find no concrete evidence otherwise.
Posted by: Brian P. Mullin at 06/29/2009 04:29:54 PM
I cannot believe you are so optimistic, I live on Main St. and also work on Main St.With so little cash coming into gov't coffers, who do think is going to buy products? Get ready for the roller coaster we are not buying anything period end of discussion.
Posted by: Alan at 06/29/2009 04:32:58 PM
I'm guardedly optimistic, if for no other reason than the higher savings rate. While the end of consumers spending everything they had, could borrow and could wring out of their houses will no doubt slow the recovery, maybe it will also mark a return to peoples' understanding that you cannot spend what you don't have for ever. There may be occuring a major "correction" in the spending habits of this and the next generation. My parents always cautioned about the depression. Maybe this will "stick" too.
Posted by: Green Man at 06/29/2009 05:43:29 PM
One reason we have gotten into such a horrible economic mess is believing the ra-ra BS of investment bankers, economists, politicians and the corporate media. The truth is we've sold off many of our real industrial assets and substituted the smoke & mirrors illusion of an "Information Econom"y and then a "Services Econom"y, both of which required enormous consumer credit bubbles to be even minimally convincing. Now that the bubbles have burst, the financial services sector has no credibility whatsover - they're always simply sweet-talking The Market to keep the rubes ponying up their cash and The Game going all night. Look, if you want to know what's really going on, read Nouriel Roubini: he doesn't get paid by Wall Street insiders to deliver The Good News - he simply tells it like it is. My Forecast: when the remaining air in the consumer credit bubble finally leaks out, we will awaken to find ourselves in The New Economy. Being cheerful because the American consumer has a history of compulsive spending above their means is naive, because who wants to loan the increasingly risky American consumer any more money to spend? Some of our largest creditors are already talking about replacing the dollar as the world's reserve currency. Somebody needs to gift a daily coffee service to the folks at Kiplinger before they manage to convince grandpa to blow what's left of his IRA on the stock market.
Posted by: Hudey at 06/29/2009 06:14:56 PM
Why does Kiplinger hide the comments at the bottom of their stories? I bet 80% of the people who read a story don't look at them, and that's probably what Kiplinger wants. They want people to mindlessly follow this drivel they're shelling out, not to see the real truth. So I ask, what is Kiplinger's goal? To inform people of what's going on or to keep them in the same dark closet they've been in for the last twenty years?
Posted by: tony at 06/29/2009 11:10:17 PM
yeah, i agree. we should spend as much as we can now because we wont be able to spend much in the future. CRAP & TRADE, universal health care, CHECK CARD, banks reducing credit limits especially for small business, trying to refinance commercial real estate loans when property has decreased in value, more and more layoffs - yeah, im pumped. gonna run up as much as i can while i can. gonna buy some guns and ammo too. this hopin and changin stuff is starting to really worry me. but then, i dont get paid to b.s. the public with the administrations hopin stuff.
Posted by: someone else at 06/30/2009 10:00:31 AM
I think it is very irresponsible to say that the biggest economic turmoil is behind us. In the coming year or two we will see the largest demographic change in US history. We will see millions of boomers retire and try to downsize their homes, capitalize on their retirement savings and sell their way out of the market to condense their economic lives to live off of savings. If that swing in spending is not an economic downturn then I don't know what is.
Posted by: Joe Honick at 06/30/2009 12:57:09 PM
I am saddened that so many commentators avoid telling us who they are. It would make their statements more effective. Jerry, you have made good points here, but the reality also is that one of the most damning factors is the death of public confidence in big business, big government and national leadership in general. As to the idea that banks are coming back, I would suggest that not one of them has the confidence and trust of those who must use them. As unemployment has risen, some of the very people who helped get us into this mess are now being rewarded by massive infusions of taxpayer money but with virtually no clue to job creating proposals from the White House. Whatever became of the massive public works program the President-elect promised in a major declaration on December 8, a program that would exceed Eisenhower's?
Posted by: Green Man at 07/03/2009 12:25:56 AM
I disagree with Mr. Honick. A person's real name in a reader comment is totally irrelevant since we're all unlikely to know them personally anyway. Worse yet, the opinions of recognized experts have become equally irrelevant since most of them missed the economic meltdown until it was already a firm grasp of the obvious. The only thing that matters in Reader Comments is whether the opinion rendered sounds like the truth or not. IMHO, most of the reader comments to this article seem more realistic scenarios than the article itself. Hey, maybe we should outsource our country's highly paid Economic Advisors to lower cost Reader Comments Advisors, and, you know... more efficiently allocate economic resources by employing lower cost providers. Boy, I'll bet that would change their pro-Globalism B.S. in a big hurry. New World Order: Uncle Sam to China "can we borrow another trillion dollars, we spent the TARP money and now we're broke again."