Goldman Sachs (GS) Senior Economist Ed McKelvey is of the opinion that our economic recovery isn’t likely to be a robust one. He sees one more stimulus between 2010 and 2012 ; and predicts the jobless rate won’t peak until after fiscal YR2010.
McKelvey points to five major factors that push an economy from recession to recovery.
1) “Economic policy has become stimulative, always with monetary easing and often with a fiscal package as well.” This has already begun through the Federal Reserve’s actions and the government stimulus. Still, McKelvey expects there will be at least one more stimulus between 2010 and 2012.
2) “Demand for owner-occupied housing has picked up in response to easier credit conditions, prompting a sharp recovery in residential investment.” While demand for housing might pick up if house prices find a bottom, a huge excess supply of unoccupied homes remains on the market. McKelvey says that the large housing inventories mean residential investment is likely to be muted for a long period of time.
3) “Consumer spending on durable goods has also rebounded, partly because home purchases stimulate demand for durables but also because credit has eased.” In this recession, consumers aren’t likely to follow their past patterns. McKelvey points to a structural shift that has consumers boosting the saving rate as high as 10%. (The rate has been on an uptrend in recent quarters but still is around 4%) The increase in the saving rate combined with less access to credit makes it less likely that consumers will significantly increasing spending.
4) “Companies have usually been quick to boost payrolls, thereby transforming these increases in demand into increases in personal income and consumption via the economic multiplier.” McKelvey notes that this has been a key factor in most postwar recessions, but in downturns in the 1990s and early 2000s had already been showing signs of a shift. Corporations focused on increasing productivity, lengthening schedules and hiring temporary workers. As companies worry about the sustainability of demand, they are likely to follow the pattern again in the current recession.
5) “A sharp swing in the inventory cycle — from liquidation to accumulation — has turbocharged recovery in the factory sector.” McKelvey says that the inventory swing could occur, showing up as a quarter or two of strong growth. However, the other issues weighing on the economy will raise questions about sustainability.
Graph: Trading Economics