The Economic Outlook: Less Bleak?

The Wall Street Journal reports that Ben Bernanke made these mildly optimistic remarks:

Recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding, and consumer spending, including sales of new motor vehicles. A leveling out of economic activity is the first step toward recovery.

My guess is that the second quarter of 2009 will not look as bad as the previous two quarters.  Housing construction can no longer be a source of contraction, because it has already shrunk so much.  The auto sector is unlikely to fall further.  Used car prices are rising, and that usually indicates that purchases of new autos will pick up at some point.


On the worrisome side, the stock market seems to respond primarily to news about the banking sector. In my view, that is not healthy, because my guess is that the probability that all the major banks are now solvent is pretty low.  It may take a few months, but my guess is that at some point we will see a few big banks get shut down.  I also wonder about the outlook for commercial real estate.  How many shopping malls are close to going under?

The most difficult part about assessing the economic outlook is figuring out what sectors will produce growth.  The economy's health will not be defined by the behavior of its declining industries. It will be the growing industries (or absence thereof) that will determine the rate at which people are able to find jobs.

It is not sufficient to stop the bleeding in housing and autos.  A revival of animal spirits somewhere else will be a necessary part of a robust recovery.

Presented by

Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.

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