Economic Update

Today I heard a presentation by well know economist in the Pacific Northwest, John W. Mitchell. I have heard John speak many times. I always look forward to what he has to say. He can make the dull science very interesting.

In his presentation he reviewed where we are in historical perspective, see the two slides from his presentation, where we are now and where he thinks we will be down the road.

As you can see from the first slide the current recession is greater in length than any other modern recession at 18 months and still counting (NBER stands for National Bureau of Economic Research). We won't know how long the current recession will last until the data has been scoured a year or so after the recession is over. For those over 40 we have been through this before, not quite so severe, but the 1973-5 & 1981-2 were relatively long recessions.

The second slide is trying to say that anyone under 40 has not experienced a major recession. Only 5.3% of the time period from Nov. 82 to Dec. 2007 was the US economy in a recession. This just says that many members of our population only know stock prices going up, except for the tech bubble blip, and housing prices escalation. It was a no brainer to make money in these two areas. That has now come crashing down. These were the go go years of spending and excess. It is an opportunity for the younger (older set too) set to learn to save which will have a major impact on slowing the economic recovery since over 2/3rd of US economy is depended on consumption. Data that just came out yesterday shows the saving rate at its highest level in many years as an example. Good planning for the individual but bad for the economy. It will take awhile to adjust to this change.

As you know the recession is being led by the housing value decline. He sighted many reasons for this but the main one I came away with other than the obvious ones is that people thought home prices only go up. If they entered into a mortgage that they could not afford they could sell at a profit if something went bad. How wrong they were/are. It is human nature. It is really no different than the tulip blub mania in the 1700s, Internet stocks or Railroad/Canal Shares.

John said that four month ago there were no positive signs in the economy. But now there are some positive signs that the economy is nearing the bottom. He expects the bottom to be hit in the third quarter or the latest in the 4th but the recovery with be very slow compared to the recovery from previous recessions. This is a global recession impacting all countries an States except for North Dakota, do you want to move there?

He stated that we are going into unknown territory with all the smorgasbord of government policies, the incredible high federal deficit and huge amount of money that has been and will continue to be pumped into the economy. He said these are exciting times for economist and policy makers. What will not be so easily is when the economy does bounce back how and what to "Unwind The Stimulus". This will be much harder. From history we know that this was not handled well in 1937-8 with pulling back too early and 1966-7 when pulled back too late causing severe inflation many years later.

He did reemphasize that the recovery will be slow and there could be a relapse in 2011 or so if the "Unwinding" is not handled correctly.

Thank you John, stay tuned.