This is the usual environment surrounding Macro when we aren't in a recession -- ho hum. It isn't easy to get people excited about bits and pieces. But lurking below all this information is a scenario that has both good and not-so-good implications. Two stages usually follow the worst part of the recession -- one (the recovery) in which the declines get smaller and then one in which true expansion takes place. We now appear to be in the expansion phase and we are already seeing tell-tale signs -- including rising commodity prices and increases in interest rates. This is normal. This is expected. This shows that resource slack is declining and we are starting the movement toward normal capacity production. If this continues for a while it will eventually impact labor and employment. Once this occurs the signs of the expansion will be broader and should engender a more optimistic stance from consumers.
So far so good. But now think about your latest battle with the flu -- the bug left your body and you felt stronger so you decided to cook dinner, wash your car, and mow the yard. Hmmm -- you did a bit too much and now you are back in bed. The economy is no different. While the patient is feeling stronger right now -- this won't lead to a lasting recovery until three things happen. First, the disease has to be gone before a full recovery is possible. Note that we still have not done much to resolve the housing or the credit problems that preceded the recession. If excessive use of leverage by private companies and government precipitated the recession, this too needs to be addressed. Second, even with the original disease gone, we have to make sure that we don't overdo the recovery...we don't want to do too much too soon. If the world economy jumps into fifth gear too quickly and oil prices rise to $90+ per barrel or if long-term interest rates, including mortgage rates, jump another 100 basis points -- surely this will negatively impact the pace of economic growth. Third, we have to pay close attention to side-effects of whatever drugs we took. That is, in the past year or two the government spent a lot of money. The Fed emitted a great deal of liquidity into the economy. We now have future prospects of inflation and much larger deficits and debt that must be financed. This means we will have to make collective decisions about the future course of expenditures and taxes.
The point of this post is to emphasize that while the news seems a little boring right now -- there is much to think about and much to do. We should not get lulled to sleep by a nice cup of calming tea. Avoiding a double-dip recession or an extended period of slow growth is possible but it means sticking to the medicine and the right treatments.