The Recovery Will Be Fast

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Sudeep Reddy takes note of an important fact about the current recession:

1.  Cutbacks in employment (and, I would add, hours worked) are sharp relative to the cutbacks in output. 

In addition, I would point out that:


2.  The stock of automobiles is aging, because hardly any new cars have been bought for the past year.

3.  Household formation is falling, because people cannot afford to form new households.

4.  The rate of homebuilding is way below the long-term trend.

All of these factors will turn around once economic growth picks up.  Firms will find themselves needing to add workers in order to meet demand.  People will have pent-up demand to form households and get new cars.  Homebuilding will actually start to contribute positively to growth.

Another point that I would make is that at some point Washington may stop making things worse.  The politicians have created huge uncertainties about the energy industry, the health care industry, and the future path of debt.  Whether the policies that are enacted this year are good or bad, one can hope that one way or another the issues will have been settled.  Unless there is active talk about a "second stimulus," the agenda for 2010 ought to be less disconcerting.

There is still a lot of downward momentum in the economy.  Businesses that operate in a shopping mall or strip mall, and the commercial real estate firms that depend on rents from such businesses, are all pretty shaky. 

But when things stop going down, my prediction is that they will turn up briskly and steadily.  In my opinion, a "double dip" recession is extremely unlikely.

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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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