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10-2010 From the Editor
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Patience is the Prescription for Our Sickly Economy
By Tim Triplett, Editor-in-Chief

The National Bureau of Economic Research’s declaration that the recession technically ended in June 2009 is like your doctor telling you that, technically, you’re cured. Small comfort if you still feel sick. Diagnosing the economy, a handful of experts speaking at MSCI’s forecast conference last month in Chicago basically agreed the patient is on the mend, but is facing a long, slow convalescence.

On the positive side, the economy has gained a lot of ground since the recession ended, led in large part by manufacturing. “We should be feeling pretty good—but we’re not,” said William Strauss of the Chicago Federal Reserve Bank. Why? Because 60 percent of that gain was due to inventory rebuilding, not actual consumption. “Final sales, GDP minus changes in inventories, is abysmally low. It’s definitely not taking off with any gusto,” he said.

Making matters worse, bank credit contracted in 2009, said Paul Kasriel of the Northern Trust Co. Uncertain of the future and anticipating a second wave of defaults on commercial real estate loans, banks are reluctant to lend. “A banking system unable to create credit leads to a weak recovery,” he noted.

Consumers are saving more and spending less, motivated by the same uncertainties as the banks. Fears of an economic relapse were palpable at mid-year when growth slowed and key indicators turned south. “The double-dip concerns were suddenly very real,” said James Sweeney of Credit Suisse. But conditions have improved in the last few months and “key global stabilization will come near year end,” he predicted.

Despite what the political ads on TV may suggest, most experts agree federal stimulus programs have helped. With about half the government money remaining to be spent, there is still some stimulus effect to come in 2011. “The stimulus money has definitely made a difference [in public projects], but I am concerned about what happens when it runs out. We should see its effects start to dwindle in the second half next year,” said Ken Simonson of the Associated General Contractors of America.

The most troubling symptom of the current economic malady is the crippling unemployment—for which none of the speakers offered a real remedy. Like a high fever, it promises to keep the recovery lethargic. Currently at 9.6 percent, the nation’s unemployment is slowly improving, but could remain above 8.5 percent next year. The economy has to create 100,000 new jobs each month just to keep up with population growth. Only after GDP tops 3 percent can the economy begin to whittle away at the joblessness, said the experts, and finally make us all feel like we’re out of the woods.

  
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