If this was a normal economic recovery which came in the wake of a moderate recession, it would
probably be ok to posit that economic expansion will end around mid-2013 to be followed by an
economic recession of six months' duration. This idea would fit with the old, well established
presidential cycle as well. But what we have is a rather mild recovery coming in the wake of a
mild depression or severe recession, take your pick. My measure of capital slack, which
incorporates excess production capacity, proximity to full employment, short term business credit
supply and demand and short term interest rates has, in the aggregate, only recovered about 50%
of the slack between the cyclical low point and full, effective capacity and employment. In short,
there is substantial slack or idle resources in the system which in my view is sufficient to underwrite
another 3-5 years of continuous economic expansion.
Historically, to generate an economic downturn prior to when the economy's resources are maxed
out in the shorter run, conditions are required which generate a liquidity squeeze in the system
either because the Fed drains monetary support or because the banks remain overly wary in
providing financing to an otherwise viable period of growth. And, I guess, you can have some of
both with banks following the Fed's lead.
Now, I am of the view that the economy can keep right on expanding as long as there is enough
slack and the system can maintain reasonable balance especially between money and credit and
output and income. The Fed has maintained the money / credit balance with QE programs to
underwrite the economy while the private sector credit situation repaired. Ditto the US Gov't
stimulus and bail out programs just prior to the outset of recovery. The balance between output
and income has been far less favorable as business has opted not to reward worker productivity
but to hand out 1 - 2% wage increases instead and ultimately force consumers to draw on savings.
Except for real estate, private sector credit demand is recovering decently enough and the need
for Fed QE intervention has been slackening. To secure an economic recovery which can extend
in lengthy fashion, business must step back from the trough, pay its work force substantially better
and make sure it is adequately resourced to handle higher levels of business. Failing that, there
is no compelling reason to expect consumers to keep up their end of the bargain -- and keep it
up they have -- if you look at the critical real retail sales chart.
A final and important point. With the private sector credit situation repairing decently after the
financial blowout of 2008, it would be unfortunate for investors to throw a tantrum now because
of no apparent new QE, and trash the stock market again as happened in 2010 and 2011. This
would only serve to undermine business and consumer confidence and set back the time when
the economy can be self sustaining.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!