Realistic Recovery Outlook

Everyone has a sharp eye out for economic indicators that things are headed back up the bull mountain. It’s natural, and part of the fact that everyone is tired of the recession. But we do need to be realistic because setting expectations too high could kill confidence when things don’t bounce back as quickly as we’d like.

First, we need to realize that the high growth of 2002-2007 was built in part on a faulty foundation, on misaligned incentives from the regulatory structure and over leveraged firms. We want steady, stable growth, not another bubble (though bubbles are inevitable, their depth and severity can vary). So if we don’t get back to 14,000 or even 11,000 in the Dow by 2010, that’s okay. Let’s build carefully with the future in mind.

Second, growth is a compounding thing, and it reaches its full potential when all industries are clicking in stride. As such, it will take time for the economy to build momentum, as Bernanke warned in a speech earlier this month:

“Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes.”

Third, unemployment is a significant factor in the economy, but the number of long-term unemployed individuals (six months or more) is even more of a concern, comprising about 25% of the numbers through April. That long-term share represents those that aren’t just caught up in a layoff (or something similar) and taking a month to move to another job, but is those who have been on the search a while and can’t find a place to land. To top it off, the job growth outlook (though not as bad as projected in April) is bleak.

Fourth, for everything in the economy to be back on track, we need the housing industry moving forward to help bank asset prices and free up capital for lending. Unfortunately, today Lowe’s home improvement stores reported a 22% drop in for the 2009 first quarter, which is reflective of where the housing market is at right now. People aren’t buying a lot. Yet, while the company is preparing for more hard times, they do have a positive outlook on the future as CEO Robert Niblock said:

“In recent weeks we have seen consumer confidence improve, housing turnover show signs of a bottom in certain markets, and home prices slow their decline. […] These are all positive signs for the stabilization and ultimate recovery of home improvement industry sales, but since many of these variables remain at or near historic lows, we will continue to plan conservatively and manage expenses appropriately.”

Until the housing market is back on solid footing, we’ll only see slow to moderate gains in the economy. And while we’re probably seeing the bottom of the housing bubble, it’ll be a while before it’s completely back on track. We need to be realistic about what recovery looks like, and what it looks like on the local level compared to the national level and let that guide our expectations and confidence in the market.

Addendum: Yet, after saying all that, let me remind myself, and everyone else, that the sharpest minds in the world didn’t adjust or foresee with actionable warning time the economic downturn. So your experts could be wrong. We could bounce back fast. Or never with the weight of government spending on our backs.