Friday, November 14, 2008

From here on out it’s going to be bad

Truth be told, I could be convinced that the economy started to contract at the end of 2007; the labor market obviously initiated its descent in January 2008, and other indicators were clearly weak. However, the jury’s still out since real personal consumption expenditures grew an annualized 0.6% over the first half of the year, and GDP expanded at a 1.4% click. But who really cares? That’s all behind us now, and unfortunately now is really bad and only going to get worse.

If the economy was using exports as a cane to walk before, it is now completely incapacitated. The recession is fully underway, as evidenced by the bad economic news that is really pouring in. But Bernanke & Paulson, Inc. have not cleaned up – or even straightened up - the mess in the financial markets. At this point, for each week that the credit markets remain on red alert, just add a couple of weeks to the recession; this financial mess will pass through to the real economy.

You see, all the bad economic news that is coming out right now stems from shocks that occurred six months to a year ago: (1) the sinking housing market, (2) the struggling manufacturing sector, and (3) surging oil and gas prices. The economy was already facing serious headwinds, and those headwinds would have produced, at worst, a mild recession. What was once a running shot at coming out of shocks (1) through (3) with only minor cuts and bruises, is now just a pipe dream.

Both consumers and firms alike are being (or will be) forced to cut back spending on a global scale. Policy makers are doing a dirt-poor job of making good decisions, and the only way we will get out of this one is through an intelligent and coordinated global policy attack. The G20 Summit is a good start, but don’t get your hopes up; it’s going to take more than a weekend meeting to get us out of this mess.

This recession will end, they always do, but the near term will be bit painful. I have every faith in the resilience of the U.S. economy, as it sits on a solid foundation. We are highly productive, our labor market is flexible, and our goods and capital markets are (mostly) free. We will bounce back, but the economic correction will be painful.

Rebecca Wilder


  1. But, according to them, they didn't see it coming - shocks (1) through (3). In a way, this is forcing people back to more what the Christmas season was like in the earlier 1900's. Many fewer decorations, presents and opulent consumption. On top of this, we are in a lame duck session with not much to be done until into January 2009.

  2. HI Janie,

    You know that I am not big on deficit spending, but if they are going to do it, then right now is the time to do it. I can't believe that they are pushing this back to Jan 2009 - by then the recession will be much worse, they will pass an even bigger spending bill, and stimulus won't even hit the real economy until the economy is already improving on its own.

    Thanks for reading, Rebecca