What inning of the economic recovery are we in?
Jun 4th 2009 11:30AM
Updated Dec 4th 2009 1:43PM
If you've ever driven a car for a couple of hours with a handful of young children strapped into their car seats, you've probably heard the line, "Are we there yet?" This question comes to mind when contemplating where we are in the economic recovery from the Great Recession that officially began in December 2007.
My answer? I don't know -- but I'd guess the fourth inning. This means we'll be lucky to resume quarter-to-quarter economic growth in 2011. To provide a bit of color on how I reached this guess, it's worth pointing out that my somewhat oversimplified instrument panel for measuring the economy takes into account five factors: changes in stock and housing prices, incomes, spending, and innovation-fueled economic activity.
Of these five, the one that concerns me the most is the last one -- we have been too dependent on borrowing to fuel growth in the last decade and we need to revive (without some of the excesses) what we had in the 1990s -- when venture capital fueled new companies that transformed the way businesses operated and consumers made purchases.
Unfortunately, the short-term fixes in place -- including a $1.85 trillion deficit, equivalent to 13 percent of U.S. GDP -- seem destined to reflate the very debt bubble that got us into the current mess. And with as much as $17 trillion in national debt forecast for 2019, the U.S.'s annual interest expense could grow 374 percent from $170 billion in 2009 to $806 billion in a decade. And this assumes a 4.7 percent 10-year yield -- if the yield rises, that $806 billion could be mean even more interest expense crowds out other uses of cash.
Without further ado let's look at each of these five economic dashboard instruments in more detail:
- Stock prices. Anyone who owned Dow stocks is now down 38 percent from the October 2007 peak of 14,093. Unless you bought stocks en mass this March 10 -- in which case those holdings are up 32.5 percent -- you are probably still afraid to look at your account statements. And if you bought tech stocks in the 1990s, the NASDAQ is still 63 percent below its March 2000 peak -- nearly a decade later. I think it would be very surprising to see the Dow rise 62.5 percent from here -- a 10.2 percent compound annual growth rate -- to get back to its 14,093 peak by 2014.
- Housing prices. Housing is an intensely local business but prices are down on average about 32 percent from their peak and with 5.4 million mortgages in default or foreclosure, it appears difficult to believe that there will be enough new demand to soak up all the supply that foreclosing banks dump on the market. With banks still needing to write off trillions in toxic waste -- and the 19 biggest in the hunt for $75 billion in new capital -- they are not going to be making loans to anyone but the most creditworthy. This means that it could take up to a decade before all that extra housing supply gets soaked up and prices start rising.
- Incomes. Inflation adjusted median family incomes fell between 2000 and 2007. With six million jobs lost since the Great Recession began, that trend is likely to get worse before it gets better. At this point, there is very little economic growth to reemploy those people. And the recent bankruptcies of GM and Chrysler add tens of thousands more former workers at auto dealers, car factories, and suppliers to the ranks of the unemployed.
- Spending. The current structure of the U.S. economy depends on consumer spending for growth. More specifically, some 70 percent of GDP growth comes from consumer spending. And the most recent statistics suggest that thanks to Obama's stimulus plan, incomes were up 0.5 percent in April although consumer spending was down 0.1 percent as the savings rate spiked to 5.7 percent. This lower consumer spending creates a spiral of excess production capacity, worker/consumer layoffs, and less income available to spend -- hence lower spending as the cycle begins anew.
- Innovation-fueled economic activity. This leads to my last point -- unless we change our economy from one that depends for growth on cutting wages, borrowing and spending to growth through venture-capital fueled innovation, we are doomed to repeat the same mistakes that created the bubble that burst in 2007. If such innovation fueled growth can resume -- and two recent initial public offerings (IPOs) suggest that's possible -- then it could be another decade before we get back to the economic dynamism we enjoyed in the 1990s.
I guess that does not sound like a very cheerful answer. The good news seems to be that things are getting worse at a slower rate than a few months ago. For example, spending dropped 0.3 percent in March and the boost in the savings rate strikes me as good news. CEOs are getting more confident -- the CEO Confidence Index was up 48 percent in May 2009 since it hit bottom this February.
I also find it an improvement that I don't spend weekend after weekend obsessively following the details of the next Sunday night financial bailout as I did last fall.
Are we there yet? Maybe we're in the fourth inning.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.