Saturday, May 3, 2008

We'll See


Everyone was relieved that yesterday’s employment report ( showed a drop of only 20,000 jobs in April and that the unemployment rate fell a little. Maybe the recession won’t be so bad.

The stock market seems to think that the worst of the financial crisis is behind us. The Dow closed the week over 13,000 and the S&P over 1400.

Besides, the Fed reduced the federal-funds rate to two percent and the economic stimulus plan’s tax rebate checks are in the mail.

There’s blue sky ahead!

We’ll see about that. The big question is not whether or not we are in a recession, or how bad the recession will be or how long it will last. The important issue is: Can we reasonably expect the economy to resume robust growth any time soon?

Let’s review. During the boom of the 1990s we enjoyed an unusual supply-side phenomenon, driven by the New Economy’s new technology. That ended in the 2001 recession. The Fed replaced it with a demand-side boom driven by low interest rates that spurred the real-estate asset-inflation. That’s ending now.

What can we reasonably expect will provide a strong encore to these two expansions? What new-technology supply-side boom awaits us? Can reduced interest rates re-work their demand-side magic? There’s a great deal of excitement about the green revolution, but it isn’t upon us the way the New Economy was in the 1990s. Interest rates are falling, but they need to overwhelm a great asset deflation. Falling prices are a boulder in the real-estate market’s road to recovery. There’ll be no great supply-side or demand-side expansion soon.

That doesn’t mean the economy must plunge into another Great Depression. But it may mean that we can reasonably expect economic sluggishness for a while. If that’s true, GDP, productivity and profits will grow slowly. The stock market’s Price/Earnings (P/E) ratio may have to adjust downward. If earnings grow slowly and the P/E shifts downward, the stock market will remain in the doldrums for a while. If real-estate prices don’t recover robustly from the asset deflation, the nation’s wealth will languish. Hesitant consumers will dampen retail expansion. Sprawl will slow.

Blue sky ahead?

We’ll see.

© 2008 Michael B. Lehmann

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