The latest installment in my effort to understand the Heart of the Economy, and how living from the heart can manifest in our economic and financial lives.
Are we in an economic recovery?
We want to believe it. We search the news for any sign of positive economic development. I personally find it painful, being a naturally optimistic person, but at the same time I don’t want to be blind to the forces that are holding back the recovery. Let’s look at both sides.
Pro:
- Real GDP increased at a +2.4% annual rate for Q2 of 2010, following a Q1 performance of +3.7%, which includes a real non-residential fixed investment increases of +17% for Q2 and +7.8% for Q1.
- Employment numbers have been positive for most of 2010, with a total of about a 700,000 new jobs created (even net of June and July’s declines). In July, the manufacturing sector added 36,000 jobs. (Here’s a nice Wall Street Journal article with some good graphics on these job market stats.)
- Upward pressure on prices is non-existent; in fact, for the year inflation is nil.
- The stock market has rallied, gaining 7.4% in the month of July. The market is still slightly up for the year.
- It’s a hopeful sign that Bill & Melinda Gates and Warren Buffett have convinced 38 of their fellow billionaires on the Forbes 400 list to give substantial portions of their wealth to charitable causes. Many have pledged to give away half or more of their fortunes.
Con:
- The BEA has revised their numbers on GDP growth for 2006-2009. Before they had an average annual real growth rate of +0.0%; now it’s -0.2%. Much of the increase in growth has been due to short-term factors: big increases in government spending, funded by debt, measures designed to stimulate spending, such as the home-buyer’s credit, and the Fed’s pumping trillions of dollars into financial markets.
- Government debt levels are high. (Here is Federal debt, here’s state debt.) Most of the states are struggling with budget deficits, and are slashing spending, while at the same time borrowing more, in new ways (e.g. from state pension funds). All of this will lead to continued cuts in spending, increases in taxes, or both until fiscal health is restored, a strong negative for future growth. Remember government spending is about 20% of GDP.
- The stock market is expensive. For the S&P 500, the 10 year trailing real price/earnings ratio is 20.41; the dividend yield is 1.8%. The market tends to touch bottom with a dividend yield of 6 to 8%. I expect to see a P/E ratio of around 5.
- Consumers are much less interested in spending, and a lot more interested in saving, which we can see both culturally (remember bling?) and in the economic data.
- Despite the generosity of the billionaires I mentioned above, the rich seem a lot less interested in taking risks. Fortunes have imploded during the recession. There is strong interest in fear-based investments: US Treasurys, gold, diamonds, art and other collectibles, as a hedge to declines in financial assets and inflation. This is an ill sign for future investment.
I’m still on the bearish side. What would make me bullish on the recovery? I’d like to see the government do less tampering, get out of the way and let the economy adjust. A flurry of government measures tends to give you stagnation, a painful period of denial.
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The attempts to deal with the recession seem to me various ways of trying to avoid short-term pain, at the price of long-term pain. Modern economies are remarkably sensitive to price changes, and will adjust to them quickly. Long-term rigidities in markets cause distortions, failures of the market to adjust. A good example is borrowing huge sums of money to shovel into financial firms, under the TARP legislation passed by the Bush Administration (add it to the list of things I have to forgive).
I think it would be better to do as a nation what I know is good to do as a person: don’t try to avoid pain. Embrace it and learn from it. Pain is a powerful opportunity for growth. What are the lessons of the recession? By denying the reality of the recession, there’s something we’re not facing about the economy and about ourselves.
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p.s. I’ve set up a new archive of the articles on the economy from this blog.
