The previous expansion peaked in December 2007, which means we are now eighteen months into the current recession.
The good news is that signs of stabilization suggest that we are closer to the end than the start of the recession. The bad news is that we aren’t quite there yet.
The economy that emerges from this recession is expected to be less reliant on consumer demand and more reliant on investment and export demand than it was in the past. Constraints on credit, coupled with the need to finance and repay our federal debt, will force consumers to live within their means and significantly increase the rate at which they save.
The forecast for growth in the second half of 2009 and first half of 2010
The economy is expected to move from the red into the black over the summer. It will likely take until well into 2010, however, for the recovery to take root and for growth to become truly self-feeding:
Consumer spending is expected to stabilize but remain muted relative to trend. Credit markets are starting to ease, but lending is still limited to all but the most credit-worthy of borrowers.
Business investment is the primary constraint on growth. Commercial construction activity is expected to be particularly weak, as financing has all but disappeared for new projects in recent years. The Fed is expected to help jumpstart financing by buying in the market for commercial mortgage-backed securities.
Inventories are still falling in response to uncertainty and tight financing conditions. There are signs, however, that inventories have dropped below demand in some sectors, such as consumer electronics.
Government spending is expected to accelerate, as the infrastructure spending associated with the stimulus packages gets underway.
The trade deficit will remain a drag on growth in the second half of 2009, but could easily reverse course and begin adding to growth again in 2010. Exports to Asia are expected to be particularly strong next year.
Both core and overall inflation are expected to remain relatively well-behaved. The Fed is expected to hold the fed funds rate in its current 0 to 1/4% range for the next year.
Treasury yields are expected to settle down a bit over the summer before rising again into the fall and the start of 2010.
Lower costs, lagging wages, and higher productivity growth are all expected to trigger a fairly substantial rebound in corporate profits. Weak results from a year ago are also a plus, as they are likely to boost year-on-year comparisons starting in the fourth quarter.
This, coupled with some healing in credit markets, a prolonged period of easy monetary policy and a movement off the sidelines by investors, all suggest that equity markets should rally. The timing of those gains remains tricky, however, as it appears that the recent rally in the broader stock indices have brought them back in line with the economic fundamentals. Indeed, the upside on equities over the summer may be limited.
Supplementary Recession Updates are now available at IBISWorld.com