You are driving down the interstate nearing your destination, when suddenly the unmistakable sound of The Stones starts humming through your stereo. If you are a middle-aged guy, this immediately causes you to crank up the volume (way up cause your hearing is fading), stomp down on the accelerator (even if you are driving a Buick) and start doing the Jagger rooster bob. (I personally believe that all speed limits should be suspended if a Stones song is playing on the radio and I also believe explaining to the officer that “there’s fever in the funk house now” should be good enough to get off with just a warning).
It’s after the song ends, when the volume has been lowered and the rooster has been returned to its cage, that you realize you have blown by your exit and gone entirely off course. Unfortunately, you cannot immediately start repairing the damage. You need to wait until the next exit. Even then you may need to stop for a while to make sure you know how to get back on course and to refresh. And for certain when you get turned around, you drive much slower and more cautious than when Mick was blasting through the speakers. (You might even listen to Barry Manilow instead). What your mistake has produced in your trip is slack. In order to get back on track, all the slack must be eliminated.
Today’s topic is slack and how it impacts economic recovery. In a previous post I stated that I now believe the economy will be stronger in 2012 than most experts now forecast. (the government just downgraded its 2012 forecast last week, which actually reinforces my thinking.) One reason I believe the economy could grow at a rate of 5% or more in 2012 is slack.
Recessions create slack in the economy and large recessions create significant slack. This slack must be used up before the economy can really start growing. When all the slack is removed from the economy the impact can be dramatic, but slack is usually very difficult to measure.
To illustrate, consider what happened in the platform trailer market in the previous recession. Before the economy slid, the platform trailer market was booming. Existing trucking fleets were buying many new trailers and new fleets were entering the market to handle a seemingly continuous increasing demand for freight. Trailer dealers had huge inventories to service this demand. Trailer manufactures were running multiple shifts and struggling to keep up with orders. Even after the first signs of economic weakness were apparent, trailer manufacturers considered it “just a blip” and continued at full production rates in order to keep manufacturing costs lower.
When the real recession hit, freight demand quickly dropped. Fleets had too many trailers so they parked or tried to sell their excess units. When older trailers broke down, they were repaired instead of replaced. Many fleets went out of business and their trailers went into the huge used trailer inventory. Thousands of new trailers sat in dealer lots ready for customers that no longer existed and thousands more sat at the manufactures a result of the irrational exuberance that characterized the time period. There was a tremendous amount of slack in the platform trailer market.
After the economic recovery began, it took an extended time before this slack was used up. For a long time, people in the industry wondered why the demand for new trailers was not stronger. During the time though; freight was growing, fleets were putting units back into service, profits were increasing so there was money to buy new equipment and used inventory was being depleted. When all the slack had been eaten up, something almost magical happened. Demand for new platform trailers exploded, catching the industry by surprise.
Slack impacts economic recoveries like this. Imagine that you have a very tangled rope with a ball attached at the very end. Then you tie the other end to a pick-up truck. The pick-up truck starts to move forward. You can’t see the truck or most of the rope, so you watch the ball and use that as an indicator to determine how fast the truck is moving. The truck starts at a slow speed and the ball moves a little. As the truck accelerates the slack in the rope is being tightened up, but the ball still doesn’t progress much. Now the truck is moving at a high rate of speed, at some point the rope becomes taut and the ball now accelerates at a speed equal of the truck.
This is what I expect to eventually happen with this economy. People are hoping for a fast recovery, but you don’t always get what you want with this economy, but with the economic forces at work, you get what you need. This has been a very long economic slide. We’ve been holding out so long and we miss you (economic good times). The unemployed try, yes they try, but they can’t get no satisfaction in this labor market. It’s enough to make a grown man cry.
But at some point this misery will end. It will be a memory, a memory of a slump that used to mean so much to me (and you). And once you start it up, this economy will never stop (until the next downturn of course).
People think I’m crazy, others think I’m hazy, but that’s my roll of these tumblin’ dice on when the economy will climb out from under the thumb of economic hardship and finally say goodbye to those rueful Tuesdays.
So to review: It’s all right now, except for some slack. Then it’s a gas, gas, gas.
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