Wednesday, July 15, 2009

Show Me the Growth


As I alluded to in my Farming Bubble post yesterday, before anyone talks about economic recovery, the growth question needs to be answered. Where does the growth that drives the recovery come from?

CalculatedRisk sums it up:

Housing usually leads the economy both into and out of recessions (this was true for the Great Depression too). However this time, with the huge overhang of excess inventory and high levels of distressed sales, it seems unlikely that residential investment will pick up significantly any time soon.

And that leaves Personal Consumption Expenditures (PCE), and as households increase their savings rate to repair their balance sheets and work down their debt, it seems unlikely that PCE will increase significantly any time soon. Maybe there will be a pickup in auto sales from the current depressed levels, but in general a strong increase in PCE seems unlikely. So even if the economy bottoms in the 2nd half of 2009, any recovery will probably be very sluggish.
I have yet to see a good analysis presenting what will be the growth engines for the "quick" recovery that many are now predicting. Until then, don't buy the hype, this will be a long, slow process.


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