Economic recovery: V, U or new?


Former Secretary or Labor Robert Reich says that there are two schools of thought on how the recovery will work. One expects it to bounce back as hard as it fell, in the shape of a V. Others think it will come back slower, in a more rounded U shape. He thinks both groups are wrong. And a new Reuters survey isn’t promising.

He said neither model holds up in his mind, because they rely on investors and the current hole is too deep for investors alone to dig out of. 70% of the economy is generated by consumption, and is therefore consumer generated.

And consumers have suffered too much financial loss and have lost too much security. Many are just scraping by, and those with the luxury of a little extra cash are sitting on it. And there’s no money to borrow even if they wanted to. Purchases are on an as-needed basis, and that level of spending will not be enough to pull the economy back up.

Reich argues that the recent economic pattern consumers have faced, producing more while wages stagnated, is unsustainable.

He says there will be a recovery, but what it will look like is anybody’s guess. It will be an entirely new economic model.

Meanwhile, a poll executed by Reuters and the University of Michigan found consumer confidence taking a hit from June to July, falling from 70.8 to 64.6. Reuters said experts had been expecting only slight erosion, to about 70.5, and it marked the first drop since February.

RBR/TVBR observation: It is absolutely true that consumers will be the engine to drive the recovery. It’s great that we’re seeing a number of economic indicators moderate, but the relentless bad news and negative predictions on the employment front will be the fly in the ointment until conditions in that arena start to improve.