Wednesday, August 5, 2009

Is the Recession Over?

The economy is getting better. Or at least, its getting worse at a slower rate than before. In the second quarter, GDP declined by only 1%. So does this indicate the economy’s going to get better soon?

My intuition right now is that does not. What’s really going to signal a recovery in the economy is consumer spending. And I’m not sure that’s going to pick up in a sustained way any time soon.

This is because consumers are busy paying down debt. Right now Americans have around a 7% savings rate. Money spent paying down debt is money not spent shopping. Household debt topped out in the last quarter of 2007 at 133.7% of disposable income. For a lot of families, they have years of debt still to pay off. That’s money they can’t spend.

And they will have to do so as the employment picture stagnates or worsens. In June, the US lost 62,000 jobs, which is some improvement from previous months. But the point is that we are still losing jobs. And Americans will be left with their substantial debt burdens to deal with while the economy is still hemorrhaging jobs.

That is not to say that there aren’t some improvements. Consumer spending was up slightly in June for the second month in a row. Housing starts were up 3.6% in June. The economy will get better; it’s just going to take a while.

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