Monday, June 8, 2009

Economic Recovery

This is from a speech by the Eric Rosengren from the Boston Fed on May 21:

Figure 4 highlights the recovery in several components of the economy in the first year following the trough of a recession. Several interesting patterns appear. In the previous three recoveries, the housing sector has shown the largest percentage change among the components of GDP shown in the figure. This largely reflects that this interest-sensitive component is usually buoyed by the reductions in interest rates that are the normal monetary policy response to recessions. This is why many analysts have highlighted the importance of seeing the bottom of the housing market for the economy to begin a true recovery.

Another important point related to recovery is that consumption needs to grow. While the percent change in consumption looks small in the figure relative to some of the other components, it is important to remember that consumption is by far the largest component of GDP. Because consumption accounts for more than two-thirds of GDP, these percent changes are on a large base. In short, it is very difficult to have a recovery without consumers being willing to spend, which was a motivation for some of the fiscal stimulus being directed towards increasing consumption.

In contrast, business fixed investment is not usually the driver in the initial stages of the recovery, as businesses are hesitant to hire more workers and make further investments until the recovery is more firmly established. Government spending also plays a role in recovery, as you can see in Figure 4. Certainly in the current recession, policymakers hope the stimulus spending will play a role. Furthermore, exports normally grow during the initial stages of a recovery. This is why it is important to us that policymakers worldwide respond to a recession that is clearly global.

Here is the chart from his speech:

Click for a larger image

Notice residential real estate investment was indeed the largest percentage change component in all three of the last recoveries. That means there is little reason to think we're going to see a gangbusters recovery, especially when building starts are at multi-decade lows:

In addition, there is little reason to think consumers will be the driving force of the recovery considering the destruction in their overall wealth:

The bottom line is there isn't a driver for growth -- at least one that I can see right now.