February 9, 2009

AND THE UR ACTUALLY HAS A USEFUL WEAPON IN HIS ARSENAL:

Pent-Up Demand Could Quickly Pull Economy Out of Its Hole (WSJ, 2/09/09)

The 1980 analogy may be the best available to the shock that hit an already-weak economy in the fall, when credit markets seized up, according to AllianceBernstein economist Joseph Carson. "That was government-induced; this one is market-induced," he said.

On July 3, 1980, when the Fed removed the controls, economists had little hope that a recovery would happen anytime soon. The Fed agreed, forecasting that the economy would contract for the rest of the year. In fact, July was the end of what would be the shortest U.S. recession on record. With the credit crunch over, consumers and companies raced to buy what they had held off on. Final sales rose 5.4% in the third quarter, and a further 3.6% in the fourth.

Such rebounds are actually the norm. Of the 10 largest quarterly drops in final sales over the past 50 years, nine were followed by rebounds the following quarter, with an average gain of 5.4%. The chance of any rebound in the current quarter seems far-fetched after last week's dismal reports on January manufacturing activity, chain-store sales and jobs. Still, if the government's coming stimulus package and bank plan are able to restore a modicum of confidence in the economy, recovery could come surprisingly quickly.

With the population increasing and companies figuring out ways to be more productive, the natural thing for the economy to do is grow. "Zero is not the norm," said Chris Varvares, an economist at Macroeconomic Advisers. "The norm is 2% to 3% growth."

When the economy contracts by as much as it did in the fall, it means that consumers and businesses are forgoing spending that they might otherwise see as necessary purchases.


Passing immigration reform would feed demand immediately, by bringing millions out of the underground economy, and population growth.

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Posted by Orrin Judd at February 9, 2009 8:27 AM
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