Thursday, March 11, 2010

The Whack-A-Mole Recovery or Good News is Bad News Until the Good News Really is Good News

Sorry about that title. My marketing friends will cringe but I just couldn't find the right title despite trying for almost 11 minutes. Anyway, there seems to be a big discussion among the pundits about the short-term future of the US economy -- will it be L- V- or W-shaped? While I like shapes as much as anyone -- I don't think these choices are helpful or correct. In words that Dr. House might use -- they are plain wrong.

So let's get on with it. Whack-A-Mole brings up the idea of a mole's head popping out of a board and before you can really hit it with your hammer, it disappears back in the hole. Like a roller coaster, it goes up and before it can reach the sky it goes back down again. I like this picture because I think this describes the course of the US economy for at least a couple of years...if not more. Thanks to colleague Mike B. for the idea of the children's roller coaster -- it goes a lot slower than an adult one. That's the second point -- not only are we stuck in roller coaster purgatory, but the average speed of the roller coast is pretty slow.

So I have two points -- a slower-than-average recovery typified by spurts and fizzles. This is very different from a typical V- shaped recovery -- which would have stronger-than average growth for a year of more following the recession. It also differs from the W-shape which imagines two recoveries sandwiched between two recessions. What's the deal? The deal is that we have the buds and shoots of a sustainable recovery around us now but it is complicated by at least three factors. First, the sources of the real estate and financial crisis that started all this have not been fully digested or addressed with policy. Second, we have a huge monetary overhang that must be withdrawn. Third, we have a lot of government debt to sell in the next few years.

So what? The problem is that good economic news -- news of growth in short-run economic activity will be met with rising interest rates and inflationary expectations. The rising rates will panic a lot of people. They will keep the average firm and consumer in a state of perpetual uncertainty. Even without the panic, a time of good growth will mean increases in credit demand from the private sector -- putting it on a collision course with the government for sparse domestic saving. Thus good news is bad news since strong growth will create the seeds of its own partial destruction. How long will we be in growth limbo? That's simple. We will be limbo as long as we have not full resolved housing and bad debt; as long as we have a significant money overhang; and as long as we have a government deficit/debt problem. We won't return to a second recession in this scenario because we have made progress -- housing and stock prices are higher and firms are making positive earnings...but our three longer term factors make it difficult to break out into a gallop or growth.

Of course, we don't have to completely solve these three challenges -- the more it appears that we are on the road to real solutions for them, the higher will be the growth rate of the recovery. But with today's partisan approach to politics it is hard to see that outcome arising. Some might say I am being overly pessimistic but I don't think so. It makes no sense to stick your pinky in a small whole in the dike was a tsunami approaches.


  1. Just wondering how you assess the commercial real estate situation?

  2. It isn't good. Like employment commercial real estate is a lagging indicator. Business equipment spending is picking up because a few years of not spending means equipment and software needs to be updated and replaced. But it is easy to postpone construction spending or capacity expanding real estate until the cloud of uncertainty moves on. Interest rates are very low and that helps -- but the risk environment remains high.

  3. Well I have seen lots of comments on the internet and talking heads on TV claiming that there are lots of commercial real estate loans that are in danger of foreclosure; much the same as the residential real estate market is experiencing now. I know in Florida there are problems with occupancy rate in malls all over the state. I have seen worse problems reported in NV, CA, and AZ; and reports that nation wide the problem in absolute dollars may be as bad as the residential market.

  4. Don't think you are being pessismistic but realistic. The risky environment will remain high until atleast the mid term elections but most likey it will take until 2012 and beyond when we can elect a new president and congress. The group that is in control now will be like a friction pad hitting your brake. We are going nowwhere until the friction pad is removed. Have a good weekend.

  5. Glad to see you got connected! And thanks for the comment. I hate to disagree with you but I think you may be too optimistic! I wish I saw someone on either side of the aisle who shows any real leadership when it come to economic policies. I think they all have their heads in the sand. Sans real fiscal reform the only positive part of the outlook is that these weiners will fight and offset each enough so that nothing gets done. At this point, less government policy is probably better than more.

  6. Yes, let's hand off the economy to the party with so many good ideas. Wait, eight years of republican leadership lead to the financial crisis of 2008.

    Is that rhetoric? Yes. But nevertheless Bush 43 had a republican controlled congress for six years of his eight years as President. Not sure that their ideas lead to the best things for the economy. Ah yes, I can hear it already. It is all Bill Clinton's fault for making mortgage's TOO affordable for poor people.

    We have a broken government and both parties have a vested interest in not fixing it.

    We need more voices at the table ...
    Instant Run-off Voting please!!!

  7. Just when things seem impossible to fix or change, something happens and they get worse! Unfortunately history teaches us that things often don't get better until they get worse. How is that message for our St. Patty revelers with hangovers?

  8. A recovery with fits and starts will have to do as long as the long-term road is still upward. Investing long-term (1-2 years) in this environment seems like the best strategy. Overall it sounds like the Whack-A-Mole recovery has been combined with another dubious game where every mole hole is also covered by a shell which makes it even harder to see what's poppin' it's head out until the shell itself moves, which is way too late.