Economy Recovering Too Fast?

There a lot of concern going around right now that the stock market recovered too fast. Since the Dow and S&P bottomed out in March, Wall Street has seen a rapid recovery not experienced since the Great Depression-era. Somewhat fitting considering Wall Street’s massive losses were the first seen since that time period. But some believe this growth is too fast too soon.

According to doomsday economist Nouriel Roubini,

“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.

(HT: CalcRiskBlog)

Back in May we talked about a “W” shaped recession where the economy picks back up briefly, and then dips down again before full recovery. Some might suggest that is what will happen here, but I don’t think so. The real dip back down in the “W” isn’t going to be felt until the effects of all this government spending hit the economy. Note this comment in the WP:

The fragile economic recovery has relied heavily on government stimulus spending, but new data show that as the money runs out, a sustained rebound may be elusive.

What may be a bit more accurate is to say that, as the money runs out, and the Fed tightens on inflation concerns, states will have to start making the choices they needed to make on the budgets before. Government supported businesses will get reshuffled into the economic deck as the should have before. Unemployment will tick back up temporarily from these two events and the associated stock market decline from contracted money and higher priced credit. And the economy will go through a clearing period as it should have with this recession.

“W” shaped might not be the right description if this doesn’t happen for another 5 to 15 years. But it should be recognized now that the policy responses to this downturn will be directly correlated to the next recession.