To review some prior observations:
- The U.S. economy had been growing due to “artificial” factors since 1995. This period ended abruptly with the housing and financial crises in 2008.
- Because the period preceding the crash was far from normal conditions, we cannot expect the economy to ever return to those exact conditions. Instead we should expect a “new normal” at some point, with many conditions similar to those in 1995.
- The economy is being propped up by government stimulus and bailouts. The strategy is to offer support in the short run and buy time until the economy heals and can grow on its own. This has impacted the normal business cycles and has caused some traditional economic indicators to be unreliable.
- Because of the damage done to the financial and housing markets, this will be a long, slow, recovery that is a “UL” in shape. Others have called it a “reverse checkmark”.
I still believe all these things are true, except for the last one.
The economic recovery is over. Did you miss it?
I’m not trying to be funny. And this is far from a laughing matter for the15 million people who are unemployed.
2010 looks like a “reset” rather than a recovery. Many of the graphs of industry sales and economic conditions are now following a normal cyclical pattern. If you look at just the curves, you would have no indication than anything is amiss. It is only when you compare to 2010 data to the peak years in the growth cycle that you realize how weak the economy still is. Recessions and recoveries tend to interfere with the seasonal patterns. This is not happening in 2010. The economy is not recovering, nor is it receding. Therefore, I contend it has “reset”.
Consider the job market for example. When job postings increased in Q1 of this year, people thought that the job market was improving. However, this always happens (unless you are in recession) because companies get their hiring budgets approved for the new year. But job activity cooled in Q2. In a true recovery, the job market growth would have accelerated, not fell back to seasonal patterns.
So this is a reset, not a recovery. With most industries returning to normal business cycles and the government stimulus programs losing impact in other industries, I believe the economic recovery ended sometime in May. This recovery lacked in both duration and strength. Like a disappointed bride on her wedding night, we cry out, “That was it?”
Almost every article on the economy mentions the progress of the recovery. We are expecting a full recovery, because that is what is supposed to happen. We are hoping that things recover to the same conditions as early 2008 before the downturn. But we are like older children who still believe in Santa Claus because it’s good to get the presents. We are like the fair maiden who expects the prince to show up because it’s good to the princess. But Santa Claus has declared bankruptcy and the prince’s castle just got foreclosed on.
If you apply this logic to the economic reports, it does make sense. This is not a “jobless recovery”. It is not a recovery at all, so you don’t expect much job growth. There won’t be a double dip recession because in order to dip, you had to significantly rise. Sure there was a slight recovery, but falling out of the first story window hurts much less than falling off the roof.
I expect the economy to keep following normal cycles at a growth rate consistent with a high unemployment rate and tight credit. This translates to 2% - 3% growth until the housing market begins to grow and the credit markets return to normal (two key markets that have yet to reset). Of course under these conditions, it will not be steady growth. There will be some bumps and jumps along the way.
There is some positive news with the Great Reset of 2010. Many companies are generating profits and operating well with the return of normal business cycles. Looking at the charts you could assume that everything is now fine, except that we have reset with the unemployment rate at 9.5%. That is a problem, a big problem, and will be the subject of my next post.
My panel of economic experts predicted a Q2 GDP (in March) of 2.9% and the first government estimate was 2.4%. The panel ended up nailing Q1 with a forecast of 2.6% versus 2.7% actual.
The forecast for Q3 is 3.0% which looks high at this point. I expect Q3 GDP to be around 2%. There is some type of shift going on because the total Wall Street Journal panel of economists seemed to be fooled by the low Q2 estimate of 2.4%. Only two out of 55 economists forecasted a Q2 GDP of less than 2.5% in the June survey so I would expect the 2.4% estimate to be adjusted upward.