US News: It Ain’t Gettin Better

Wow, in an effort to perk us up, US News gives us some raw meat. Real “recovery” is at least a year away – probably two.  There’s a lot of truth in here, in that hiring wont ever make up for all the jobs lost, and that wages will be less, and that you better be ready for that. 

There’s also a lot of fantasy in here.  “Spending will pick up for good once consumers have gotten their debt under control and feel more confident about the job market.” But wait:  If we still have huge employment – see above –  then wages will be depressed….forever.  And no one is really paying down debt right now, they are treading water.  So exactly when will spending pick up?  They got that wrong.

Another laugher:  Housing.  The rationale is that once interest rates start to increase, people will jump back in.  See job issues above.

At least some more reality:  the stock market is juiced right now on gov’ment money. And it’s future isn’t up.

Bottom line:  Mainstream people have no idea what’s “wrong” with our economy. But they are sure that it will get better soon. Here’s the final joke: “Every painful day brings us closer to the point where the only direction to go is up.” It has to, right?

What if it doesn’t?  The real issue is that no one can look into the sun.

Why the Next Recovery Will Be Better

US NEWS & World Report

Rick Newman, On Thursday July 22, 2010

Lots of companies are planning to hire–in a year or two. The housing market should bounce back–once prices fall another 5 or 10 percent. Consumers are nearly ready to start spending again. They just need to pay off a little more debt.

If this were a textbook recovery, growth would be accelerating, hiring would be picking up, and most of us would feel a lot better. Instead, the economy is slowing down and the job market shows signs of deteriorating. The stock market can no longer get traction. Consumer confidence is slipping back to recessionary levels of a year ago.

[See 5 reasons a double-dip recession could happen.]

It’s easy to imagine that something apocalyptic is happening, like a savage double-dip recession or the end of American prosperity. But it’s also possible that we’ve simply tried to rush a recovery that’s not ready to happen yet. Technically, the economy is growing, so that makes it a recovery, since we don’t have another suitable word for what happens when a terrible economy becomes a merely weak one. But we’ve talked ourselves into a recovery even though key parts of the economy aren’t convincingly recovering–yet.

This is the ultimate disappointment that sets in when you measure improvement in terms of things that are “less bad” than they used to be. That’s what we’ve been doing for the last year. Key measures like unemployment, car sales, and even overall economic growth are better than they were in prior periods. But they’re still pretty bad. The only thing that dramatically improved between 2009 and 2010 was the stock market, and that was artificially stoked by government spending. As those programs fade, lo and behold, so does the stock market.

[See how to prepare for deflation.]

We’ve been programmed to think of recessions and recoveries as linear events, one following the other in a clear cause-and-effect progression. But the economy is usually messier than that and it tends to follow a more jagged course, with ups and downs that can fool trend trackers. Housing, for example, caught a bit of air, then deflated again following the end of a federal tax credit for first-time home buyers. Companies stopped making mass layoffs, but are still pruning their workforces as they adjust to an austere economy. Shoppers encouraged by a year-long stock market rally started spending again, then put their wallets away when clouds gathered and stocks fell.

Eventually, we’ll work through all this slack in the economy, with a more pronounced recovery that will push confidence up for good. Here are a few swags as to when that will happen:

Hiring will gain momentum beginning about a year from now. A recent study of nearly 700 companies by consulting firm Accenture found that nearly two-thirds of them plan no significant hiring over the next 12 months. But after that, they want to start ramping up again, with 54 of American companies that cut stuff during the recession planning to build their workforce back to pre-recession levels within two years. That won’t repair all the damage done during the recession, but it would represent a much brisker hiring pace than the grindingly slow expansion we’re seeing now. And it would finally represent the kind of job market recovery economists expect to see–just a lot later in the cycle than we’d all prefer.

[See why raises are so scarce.]

Incidentally, workers who are simply sitting on the sidelines waiting for old jobs to come back risk being left out of the job market recovery, once it actually happens. “Jobs will return, but the workforce will look different,” says Cathy Farley of Accenture. She expects companies to seek more temporary workers, even for professional openings, and to be more focused on candidates with key skills instead of an impressive resume or work history. For workers, that means staying flexible and making sure you have the skills employers will need in the future instead of relying on past accomplishments.

Spending will pick up for good once consumers have gotten their debt under control and feel more confident about the job market. Debt is coming down, but slowly. After peaking at about 133 percent of aggregate income in 2007, total household debt in America is now about 120 percent of income. It probably needs to fall to 100 percent or lower for household balance sheets to be healthy again. That could take several more years, and it depends on banks remaining disciplined about lending, so shoppers can’t crank up their credit card spending, and on consumers using extra money to pay down debt instead of buying stuff. Consumers also need to save more in order to rebuild the wealth lost in the housing bust.

All told, consumer spending will probably shrink as a portion of our overall economy, from a peak of 70 percent of GDP to something closer to historical averages, probably between 60 and 65 percent. That means retail capacity needs to shrink as well. That process is already underway, with some chains going bankrupt and unprofitable retail space closing up. The workout might turn a corner once hiring improves over the next couple of years.

[See 4 things financial reform won’t do for you.]

The housing market keeps fooling analysts who expected the bust to end last fall, last winter, or this past spring. The expiration of the home buyer tax credit in April has shown that sales still depend heavily on subsidies, and those are slowly winding down, not ramping up. Still, there’s good news in the prolonged housing bust, because affordability is improving constantly and buyers will return at some point. That trigger might come when historically low mortgage rates start to creep upward and buyers decide to get in while they can. The job market will have a lot to do with a housing recovery too, so sales should stabilize once hiring resumes in force. Target: Two years.

[See why American workers need to toughen up.]

The stock market could nurse a hangover for a while. Corporate profits have been strong, but mostly because of cost-cutting, not because of increased sales. Companies are now reaching the limits of their ability to become more efficient, so profits could stagnate as the economy slows. But companies are also getting close to the point where they’re going to have to hire more people, after years of clearing out the cobwebs and getting rid of their least-productive workers. The direction of stocks is notoriously hard to predict, so timing the next rally is a fool’s game. But as government stimulus spending winds down, the real economy will have to stand on its own. It could still take a couple years for that to happen, but when it does, it should last. Every painful day brings us closer to the point where the only direction to go is up.


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