Opposing Views: How Quickly Will the Economy Recover?
by Efin Advisor | January 13, 2009
One of the hottest debates of the moment among economists, not to mention readers of this blog, is how quickly the American economy will recover from the current recession. Two polarizing views surround the issue. On one side of the question is the position that our economy will recover quite quickly. On the other side of the ring is the longer term, wait-and-see theory of our economic recovery.
Let’s start with the long, hard road. Despite the expectation of a major stimulus package, which is expected to be one of President Obama’s first acts in office, the market has not responded in any meaningful way. A part of this less than rosy forecast is that contraction within various markets is still likely to occur. Why? Corporate budgets have already been set for the year. Combined with a recession occurring in the rest of the world, US exports will remain low this year which will hurt corporate capital. Finally, fears arising from job loss, which may persist even as the economy improves, could keep people from increasing consumption. All of these factors suggest a slower recovery since anything and everything we attempt to do to fix the problem will take a long time to take effect.
Here’s the bright side to the dark side, at least if you believe the more dire economic forecast. Some economists think that because the economy is doing so poorly, this means it will recover quickly.
“Generally the sharper the recession, the sharper the recovery,” said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.
The other side of the coin resembles a faster V-shaped recovery. When would a V shaped recovery, the term for dramatic fall and then dramatic rise in an economy, take place? What has been occurring is that businesses are backing off production at a much higher rate than demand is slowing down. They are expecting to not be able to sell as much as normal, which is a reasonable belief. What happens if demand starts to go up or remains at a higher level than production? Companies will start to amp up their production which will increase their need for workers and bring more money into the economy. This could potentially happen with the stimulus package that the Obama administration is likely going to come out with. Thus, economic recovery will occur much faster than we all expected.
Which theory makes more sense to you? How fast do you think the economy will recover?
I’d love to see a quick turnaround as much as anybody, but this “V” thing sounds like a very fragile economic theory. For example, it will only work if demand begins to go up. But if companies continue to lay off workers and the dollar continues to inflate, there is no reason to believe that demand for products will rise. It’s a circular theory– it says that demand will rise, but companies are producing less, meaning they are expecting lower earnings and shrinking their companies accordingly, meaning there are more layoffs and less money being made by most companies, which means demand has no reason to go up. I think the first theory in this post is a lot more likely.
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Jessica Reply:
January 16th, 2009 at 10:22 am
With all due respect Jason, I think your analysis is flawed. First off, the dollar actually isn’t inflating, its actually going up in value compared to pretty much all currency except the Yen which is currently experiencing massive deflation. So there is no reason to believe people aren’t buying for that reason.
Also, the theory works insofar as people can continue to make money. Businesses may lay people off, but I think as the next month or so goes on, we will see a lot more money coming back to people from the government and lets be honest, people aren’t great at saving. If people start to use their stimulus checks, companies will have to hire more and more people to make more and more products. this seems like it would help bolster our economy.
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I think that the economy will take a long time to recover completely, whatever that means. I have a feeling that once the economy does recover it may not look anything like what it did before the decline began. We are at a crossroads now facing challenges of epic proportions which require significant changes in the way we live if they are to be solved. Through technology or some other means we must find a way to sustain an economy on limited resources. These new methods and technologies (such as the trend toward sustainable and renewable energy) will take a while to implement, and our economy will not be whole again until they are.
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It is the nature of economies to fluctuate, we are simply in a small dip right now. I do believe that the “V” theory is correct. Take last summer’s gas prices as an indicator- the price for a gallon of gasoline very quickly shot through the roof, and it looked as if it would never fall. Yet come autumn the price fell back almost as quickly as it rose. Our economy along with some well targeted stimulus packages should rebound quite quickly .
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I doubt very much if either theory is completely correct. Instead I posit that parts of the economy will hold true for each theory. Some sectors of our economy can follow a very sharp trend such as the v theory. Consumer products especially and other things which are based mostly upon business confidence can potentially rebound very fast. The lending and credit crisis however will take a long time to rebuild simply due to the nature of that industry. Either way it is safe to say that we will be on thin ice for a while, and that the economy as a whole may never be completely returned to its former state.
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arthur Reply:
January 17th, 2009 at 4:45 am
You’ve got the right idea. The economy is so unpredictable. Everyone acts in what htey think is their own interest without it being clear whether its actually good for them. We never really know what hte future holds for our economy and economists are always scrambling to create a model for what just happened, not what is going to happen. We should just hope that things get better, and make sure we save wisely but also invest and hold on to our investments in bad times, so we dont cause things to sink further
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