Green Shoots Watch: Patience Please

There aren’t any.

The problem I have with the economic news at the moment is that everyone seems to be in a hurry to get the recession over with, presumably so that we can all get on with something new. After all this economic stuff is getting boring and detracts from really important things like reality TV shows and summer vacations.

Why, we are beginning to read in the media, is the stimulus not working?

And after a run of extraordinarily tepid data releases all of which engendered breathless analysis that the turning point had been reached even the optimists seem to be in a funk. Wall Street, which houses the more extreme group of optimists, is already getting edgy about the ‘failure’ of stimulus. I can understand why they would feel this way: they have sales quotas to meet and the economy isn’t cooperating. And plenty of them opposed the entire stimulus plan on ideological grounds, so they want to pile on the grief quickly rather than wait and see whether the plan actually works.

Plus today we get poll results telling us that the ‘public’ too is getting concerned. Confidence in the stimulus plan is waning.

So here I go again:

Who cares what the public thinks?

The biggest risks we have are all downside. That is all the significant issues that could tilt the economy off of its current trajectory are ones that would make it worse. I cannot think of a likely event that would spark a rapid burst of growth. We are well and truly stuck in this slow motion unwinding of years of mismanagement and imbalance. It took the best part of thirty years to dig this hole. It will take at least two years and maybe many more before we have healed all the damage.

So we absolutely have to stay the course.

Relapse is highly likely.

Let me recap:

• The stimulus was too small to start with, it was half the amount needed for ‘quick results’.
• It was badly constructed: too much went in tax cuts that have little stimulus effect.
• Even so, it will have an impact: much of which will turn up later this year and early next. The Congressional Budget Office, Washington’s non-partisan score keeper, estimates that the economy will be operating below potential for at least four years, maybe more, but that stimulus will stop it slipping too much further this year before adding to a recovery next year.
• Meanwhile the economy still is shrinking albeit it at a much slower rate than last last year. The worst is over.
• But unemployment continues to pile on the agony: mass layoffs reached a record just last month, so all the talk of improvement is an illusion. The data will get worse throughout the year. The green shoots that some saw in those claims numbers last week are very weak.
• Bank loan losses are about to get worse again: the wave of credit card and commercial real estate defaults is building.
• The banks are not restored to health anyway: some have raised capital others have merely shifted cash around different buckets on their balance sheets. The usual suspects remain very weak. And the tail of potential losses on all the stupid gambling stuff [aka derivatives] still lingers in the background: a downturn could cause an implosion there and use up what precious reserves have been built leaving the system exposed and exhausted.
• Consumers are staying away from stores still. They prefer to save rather than spend. So demand is still way off the levels we need to get business back to hiring.
• Wages are declining: some businesses are cutting wages rather than firing. While this saves jobs near term, it also drains spending power from the economy.
• Housing is stuck in the doldrums and won’t come back any time soon. Nor should it. We need to build an economy on productive assets not real estate. Most people have forgotten that practically all the growth during the 2000 – 2007 period came from construction and related activities. The rest of the economy was loitering about going nowhere.
• Trade is dead. Actually it’s worse than dead. International trade bickering is breaking out which could eliminate what chance we have of getting growth from exports.
• And: we are about to double our national debt just to stay afloat.

In short the only definitively positive activity in the economy is government spending.

That’s it.

The dyke between us and the flood is the stimulus.

Getting bored with it, or thinking it is ‘failing’ is utterly laughable. It is beyond that: it is downright irresponsible.

So, as we watch for green shoots in this week’s data: patience please!