Update on the U.S. Economy
Original post made by stephen levy on Aug 8, 2009
My opinion was that we would know by the end of July whether Plan B was needed or the stimulus, financial sector and loan modification policies were working.
It is now the beginning of August and the outlook is a little clearer but not as clear or as positive as I had hoped for.
If the July employment numbers are a good indicator, the pace of job loss has finally slowed. But one month does not make a trend. We will know better in September and October.
The way the recovery is supposed to proceed is 1) first production turns up and GDP starts growing again. This now looks likely for this quarter or next quarter as the stimulus money is coming into the economy, exports are rising and companies will rebuild inventories to some extent. The depth of the decline in GDP makes at least a small bounce more likely.
Then 2) job losses stop and turn into small job gains. It takes GDP growth of 2-2 1/2 % to produce job gains so maybe by the end of the year we will be done with the job losses. But that is a lot of jobs still to be lost before the turnaround and it is not in the bank yet.
Finally 3) job growth is strong enough to reduce unemployment. If we are lucky this could start by late spring of 2010.
I think the wild card is housing. Banks and others are holding a lot of mortgages that could go into foreclosure. The administration's loan modification program is either slow to start or unsuccessful. Time will tell.
The recovery is fragile if the housing market does not continue to stabilize and that will take much more success in modifying existing loans including, I think, some reductions in the amount of the mortgages.
I would do a second stimulus package for all states and cities. We are reducing the impact of the federal stimulus and allowing our safety net programs to be reduced at a time of greater need because states and cities must make cuts to balance their budgets.
And many states including California are reducing our investments in education and access to higher education at exactly the time when we know it is most important for our future.