Increasingly, global economists are in agreement that the recession has reached the bottom or is very close to the bottom. Some are saying we have begun a very weak recovery already and are predicting a moderate improvement in 2010. What happens next?
According to Goldman Sach’s economist Ed McKelvey, unemployment won’t peak until after 2010. High unemployment has historically been a trailing indicator, typically following the beginning of the recovery by at least two quarters.
McKelvey says there are five indicators to watch that will predict when the recovery begins and how strong it will be:
- Economic stimulus plan must be working. McKelvey believes the U.S. government will have to push additional money into the economy between 2010 and 2012 in addition that which was earmarked in the Recovery Act already in place. He believes there must be further monetary easing by the Federal Reserve.
- Increase in demand for owner-occupied residential housing. This will stimulate a recovery in residential investments. This will be difficult because there is a huge surplus of unoccupied homes on the market. However, with the glut of unoccupied homes on the market, home prices will drop and buyers will not begin buying until prices have hit bottom.
- Consumer purchases of durable goods must increase. Sale of durable goods tends to follow home purchases, and with home purchases down, sale of corresponding durable goods is also down. Consumers have increased their savings rate during the last year and KcKelvey believes it could reach 10 percent. With a high personal savings rate, weak sale of homes, and low access to credit, McKelvey believes consumer purchase of durable goods will be slow to happen.
- Companies boosting payroll. In several post WWII recessions, companies have been quick to rehire workers, which causes an economic multiplier effect. During the recession of the late 1980s and early 2000s, there was a trend by companies to squeeze more productivity out of existing staff rather than having a sharp rise in employment. Using temporary staffing and lengthening schedules also appears to be a strategy that may be used, especially by manufacturing. If this happens, employees may not feel as confident in the recovery even though there may be lower unemployment.
- Shifting from an inventory liquidation strategy to one of accumulation. This has been a big factor in prior recoveries. In the next few quarters we may see this trend, but McKelvey is concerned that many companies will worry about sustainability and therefore back off of accumulating significant additional inventory once some has been stockpiled. He is also concerned that that the other issues weighing on the economy will cause companies to be concerned about long-term stability.
If one subscribes to McKelvey’s analysis, we won’t see a clear-cut uptick in economic recovery. Instead we will experience an anemic 2009 and a gradual improvement in 2010.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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