This Time Is Different

The Lehmann Letter ©

We’ve suffered through ten recessions since WWII, and are now in the eleventh. Over the past four decades, except for the 1990-91 recession, rapidly rebounding residential construction pulled us out of every slump. Moreover, those were V-shaped recessions with sharp downturns and equally sharp recoveries.

During the booms that preceded each of these recessions, escalating inflation prompted the Fed to raise interest rates and constrict residential construction. That depressed the economy. Once recession hit and shrinking demand snuffed out inflation, the Fed let rates fall. Building immediately recovered, resuscitating the rest of the economy.

The 1990-91 recession (an exception to the rule) is associated with the first Persian Gulf war. That downturn came to an end when soaring computer and software expenditures led to the 1990s dot-com boom.

In the 2000 – 2001 dot-com bust that followed the 1990s dot-com boom, dwindling profit margins – not rising interest rates – instigated decline. Nonetheless the Fed depressed interest rates from 2000 through 2003, initiating the real-estate expansion (and general economic revival) that led to the current recession.

Tumbling real-estate is at the heart of the present crisis. But this time, falling interest rates will not pull us out. Building won’t recover until the foreclosures cease and home prices stabilize. When the number of vacant homes begins to dwindle, builders’ confidence will return and construction will start to recuperate.

That means we can’t expect another V-shaped recovery. Right now we’re on the horizontal bar of an L, hoping at some point it will turn into a U. If rising real estate won’t pull us out of the ditch, what will?

Technology? It pulled us out of the 1990-91 slump. Unfortunately there’s nothing on the horizon that resembles the PC and internet revolutions.

Government stimulus? It will definitely start the recovery, and we’re much better off with it than without it. But it is not and will not be large enough to restore full employment. For that to occur, the private sector must come back. Right now there are no signs that the private sector will snap back the way it did so many times before.

This time IS different.

© 2009 Michael B. Lehmann