Suddenly everyone’s talking about the light at the end of the tunnel. Now the r-word is not recession, but recovery. Ben Bernanke sees one by the end of the year, and people seem to be believe him.
Econ professor James Hamilton at Econbrowser has a good post up examining what, typically, a recovery looks like and which components of GDP typically rebound first. The chart below breaks it down.
As you can see, consumption picks up, typically, followed by residential investment, followed by nonresidential investment, which comes last.
The problem, this time around, is that household balance sheets have seen such devastation that it’s hard to see people suddenly start to spend again. There’s been so much lost leverage — lost credit cards, the end of the household ATM — that the idea of consumer spending meaningfully picking up and getting us back to where we were seems remote.
But the other “problem” is that much of the economic devastation is part of a much larger cycle about the decay of old business models. The recession didn’t create the devastation in old media, though it may have hastened it. And the recession isn’t what caused Detroit to die — the big three have been on a kamikaze course for years. The fact that Amazon and its ilk are sending brick-and-mortar retailers to the deadpool looks like economic devastation, and it may even show up as lost GDP, but it’s not a bad thing. It’s progress.
Even if the credit system is repaired, we’re still in the middle of wrenching changes that will continue to manifest themselves in bankruptcies, layoffs, and workers who face significant lead time in finding new work for which they are suited.
Thus, economic progress, broadly defined as an economy in which our standard of living is improving and our needs are being met, may be relatively soon at hand. The measures we use to see that may not work.