Fed Vice Chair Donald Kohn made the “second-half recovery” argument yesterday in New Orleans. Noting that the financial markets have improved, Kohn reasons that as stimulus checks arrive, and the current headwinds naturally abate, the economy will come back strong:
Although the current financial and economic situation remains quite difficult, I believe that the most likely scenario over the next year or so is one in which economic activity firms during the second half of this year and then gathers some strength in 2009.
In the near term, consumer spending is likely to receive a boost from the rebates that are now flowing to taxpayers. Although the timing and the magnitude of the spending response are uncertain, economic studies of the previous experience suggest that a noticeable proportion of households respond reasonably quickly to temporary cash flows.
Note that Kohn only says “a noticeable proportion of households.” This is likely because studies have shown that most people don’t spend rebate checks.
Kohn then tempers his optimism further, by noting that any temporary boost in demand could be met either with inventory drawdowns or imports. Thus, even if the checks are spent, they might not affect overall production much:
Of course, the stimulus to domestic production will depend on the extent to which the additional demand is met by a temporary drawdown of inventories or an increase in imports rather than by an expansion in domestic output. But to date, businesses appear to be keeping tight control on inventories, and a reasonable assumption is that we will see a temporary lift to the economy in coming months.
Of course, that “temporary lift,” if any, is already likely in the stocks.