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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

August 2, 2010 at 9:45 AM

The shuns of August: Why the economy is defying a traditional rebound

August is often a slow month for business news. It’s also a month when historically wars begin or are set to begin. I’m hoping for the former, so barring major news you won’t hear much from me this month. In the meantime, we now know a few painful truths about this so-called recovery.

We know that America faces a deep and structural jobs depression. Most statistics show unemployment pain more severe than at any time since modern statistics began to be kept in 1948. This isn’t 25 percent unemployment of the worst year of the Great Depression. But it defies any comparison to other post-World War II cycles, including the previous worst, 1981-82.

We know that although the largest non-financial companies are sitting on $1.8 trillion in profits, they aren’t hiring. They are uncertain about whether the economy faces a double-dip. They also know America and much of the world remains hugely over-leveraged. But many have found ways to do much more with fewer people and offshoring of work continues. Small businesses, meanwhile, continue to have trouble getting credit while start-ups and expanding tech firms face a very stingy environment for angel and venture capital. The flush capital markets remain detached from funding productive work and new jobs.

Whatever the causes, unemployment won’t be easily fixed and will continue to be the most important drag on recovery, not least because of its effect on demand. But we know others: State fiscal crises continue, and although balanced state budgets sound good in theory, the cuts entailed as revenue remains low will keep putting people out of jobs, hurting private-sector vendors and preventing important investments in education and infrastructure.

Political paralysis is also an unavoidable reality. The financial bailout and stimulus did prevent another Great Depression. But the former was done with little guarantee of accountability or rules to prevent a recurrence. The latter was too small to fill the output gap caused by the economic collapse. Now Washington is incapable of doing more. “Never let a crisis go to waste”? This opportunity to do a real reset is circling the drain. “Austerity” virtually guarantees a double-dip.

We know the bubbles of the late 1990s and 2000s aren’t coming back. And with that, the housing market as we knew it, a seeming perpetual motion machine that concealed America’s hollowed-out productive economy and the decline of the middle class, isn’t coming back. We don’t know how to replace it.

With that comes other unknowns. The sovereign debt and Euro crisis has receded but it hardly over. China continues to recover but its internal stresses and bubbles put this progress at risk; more importantly, the trade and investment imbalances with the United States continue despite the recession. As pain continues to hit average Americans, the political pressure to confront China over its trade policies will grow. I wonder if the world economy can really expand with a wounded America? Some forecasts see cooling growth even in China, even in Canada, which avoided the worst excesses of the American banksters.

We know GDP growth has slowed but it’s unclear whether the economy can regain a modest growth path — it will make the difference between a U-shaped recovery and an L-shaped rattle along the bottom. With high unemployment and debt, wage stagnation, continued foreclosures and high debt, will the old “consumer economy” return anytime soon? And the federal stimulus is starting to run out. How will this affect demand in the months ahead, particularly given the aforementioned political paralysis? Will corporate America start to reinvent and create jobs — or has the structure of globalization changed all the old expectations and yardsticks? Finally, deflation — it’s a real possibility, but will it actually materialize? Watch oil prices for some clue.

August may give us some answers. But given the unique nature of today’s economy, don’t expect much.

Today’s Econ Haiku:

Ben Bernanke says

Recovery will be long

Captain Obvious

Comments | More in Federal Reserve, Global economy, Great Recession, Housing, Income/living standards, International economy, Jobs/Unemployment, Macro/Big picture, Outlook, Politics and the economy


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