<p>The recession appears to have reached its nadir or close to it and a recovery is soon to follow.&nbsp; The current recession has shed 3.7% of GDP since the end of 2007 equaling the 1957-58 recession as the deepest downturn since the Great Depression.&nbsp; As with most serious financial disruptions, the pessimist and those that wanted TV airtime were prognosticating another depression.&nbsp; This recession fell far short of that.</p> <p><strong>The Current Crisis vs. The Great Depression</strong></p> <ul> <li>GDP Decline&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;3.1%&nbsp; vs.&nbsp;&nbsp;&nbsp; 36%</li> <li>Unemployment&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp; &nbsp;9.5%&nbsp; vs.&nbsp;&nbsp;&nbsp; 25%</li> <li>Stock Market Decline&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 48%&nbsp;&nbsp;&nbsp;vs.&nbsp;&nbsp; &nbsp;87%</li> <li>Mortgage Delinquency&nbsp;&nbsp; 10.5% vs.&nbsp;&nbsp;&nbsp; 50%</li> <li>Bank Failures&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 92&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; vs.&nbsp;&nbsp;&nbsp; Thousands</li> </ul> <p>The Federal Reserve Bank of San Francisco</p> <p>While we are not out of the woods yet, it is time to start contemplating what the recovery will look like.&nbsp; I believe that it will share an important characteristic of the 2001 post dot-com recovery or &ldquo;The Jobless Recovery&rdquo;.&nbsp; The movement of jobs to low cost countries will continue, rising health care cost and the uncertainty of health care reform will discourage employers from hiring.&nbsp; Low cost countries will maintain a competitive advantage in labor, raw materials and energy costs for the foreseeable future.&nbsp; Green initiatives like renewable energy sources and "cap and trade" will have an associated cost of doing business in most economically developed countries and exacerbate the situation.</p> <p>Corporations will attempt to reduce domestic labor cost by replacing jobs with technology where they cannot be exported.&nbsp; The net effect will be a continued reduction in the traditional manufacturing base over time.&nbsp; New jobs in technology and the green economy will develop more slowly than manufacturing jobs in prior recoveries.&nbsp; Unemployment at the end of the 2nd quarter was at 9.3% while Okun&rsquo;s Law would suggest it should be at 8.6%.&nbsp; Fewer of the unemployed are on temporary layoff than in prior recoveries.&nbsp; The disastrous budget problems in state and local governments will also reduce the stabilizing effect of public sector employment.</p> <p>On the other hand, the long duration of the current downturn has resulted in an extraordinary level of pent up consumer demand.&nbsp; Typically, the longer the recession, the bigger the bounce in the early stages of recovery.&nbsp; In the case of our current crisis, that may be mitigated by the extent of the trauma to the financial system and banks reluctance to take on risk.&nbsp; My guess is that as in previous asset bubble bursts, memories are short lived and the pursuit of profit will once again reign supreme in short order.</p> <p>Longer term, spending initiatives by the current administration on top of the prior administration&rsquo;s reckless spending, and stimulus spending programs that evolve into permanent government programs will establish long-term record deficits.&nbsp; While some Fed officials say there is no empirical evidence of a link between government deficits and inflation, at the very least this will bid up the cost of money in the future.&nbsp; Economists have warned throughout my adult life that our current account deficit was unsustainable and that life as we know it would change as a result.&nbsp; It has not happened yet, so I will leave the prospect open that government deficits can also go on forever without recourse.&nbsp;</p> <p>Therefore, with any luck, we are moving into the next cycle.&nbsp; I, for one, will be trying my darnedest to identify the next area of speculative excess and get in and out early.&nbsp; There will be one, if not tulips bulbs, dot-coms or real estate, something else that triggers an irrational speculative spark.&nbsp; More rational people should begin planning how they are going to take advantage of the recovery.</p> <p>&nbsp;</p> 2009-08-11T00:56:59Z 2009-08-12T15:53:53Z -4.137 164 5878 true 11 28864 let-the-recovery-begin 0 2009-08-12T08:53:18Z 2009-08-12T15:53:53Z

The recession appears to have reached its nadir or close to it and a recovery is soon to follow. The current recession has shed 3.7% of GDP since the end of 2007 equaling the 1957-58 recession.

1 2009-08-12T15:53:53Z