The Recovery Will Be Worse Than You Think

The consensus is that unemployment will hold back our economy, but let's hear a word from the optimists. David Leonhardt sees some silver linings in the recovery: Pent up demand in America, rising spending in China, forthcoming stimulus plans and wondrous, distant technological breakthroughs could all make 2010 a lot more roaring than 2009's whimpering economists expect. I love a good optimist, but I think I agree with the skeptics here.

Demand. It's simply not true that the American consumer is poised for a wild spending frenzy. The White House predicts we'll be at 9.5 percent unemployment for another year at least. You can't have a consumer-driven explosion with 10 percent of the country officially unemployed. In the third quarter, consumer spending shot up as families' income fell. That's not a recipe for a lasting consumer-driven recovery. As the Free Exchange blog noted:

Perhaps one-third to one-half of homeowners with mortgages owe more on their home than it's worth. That's not a burden that goes away quickly. Cheaper housing will increase disposable income among renters, but even there consumer indebtedness is a problem

China. Real Time Economics reports that the stimulus's impact on China is mitigating, and some Chinese economists are even predicting a second dip, or "W" recovery, in the first half of 2010 as public stimulus eases and private spending kicks in. To be sure, China (like the United States) should be fine in the long haul. But Chinese consumer demand isn't yet the lifeline America needs to wrest itself fully from the recession.

Technology. Will we have a technological breakthrough in the next decade on par with the computer boom that fueled the late '90s take-off? I have no idea. Neither does anybody else. But BusinessWeek's Michael Mandel says we shouldn't hold our breath. In fact, he sees Warren Buffett's $30 billion railroad investment as a bet against technological advancements:

Buffett is betting that the next ten years will look a lot like the last ten: A lot of growth in imports, construction, energy and agricultural products. If he thought that innovation was going to be the driver of the next ten years--biotech, energy, and infotech--he wouldn't be buying Burlington Northern.