Will the economy turn around in 2012?

With the latest sightings of green shoots in the economy, it's natural to ask how long it will be until the economy recovers. Is an acceleration in economic activity just around the corner? Are we anywhere near the end of the long road back to a more normal economy?

UCLA's Edward Leamer provides a nice summary of the typical way in which the economy exits from a recession. The first and most important two sectors to pick up after a recession are housing construction and household consumption. Once the recovery is fully underway, business investment picks up as well, but that doesn't happen until housing and consumption lead the way.

The problem we face is that the sectors that generally lead us out of a recession are the sectors that were most damaged from the collapse of the housing bubble and the subsequent recession. Housing construction is unlikely to increase anytime soon, and households are still struggling to pay off their debt, debt that was made worse by the unemployment, stock crash, and housing price crash that came with the recession. (The automobile sector is also important in recoveries, but the signs there aren't any better.)

Recessions have different causes, and some types of recessions are easier to recover from than others. An increase in oil prices or an interest-rate hike by the Federal Reserve can be reversed quickly, and the recovery time is generally relatively fast. But as Carmen Reinhart and Kenneth Rogoff explain in their book This Time is Different, recessions that are caused by financial collapses are among the most difficult to recover from. When this type of a recession hits an economy, lost decades are not at all unusual.

Unfortunately for us, both housing markets and household balance sheets were severely damaged by the recession, and repairing them will take time. Housing values remain depressed with no sign of a robust recovery in sight, and households continue with the debt deleveraging process. Neither sector seems poised to lift us out of the doldrums in the near future.

These two graphs give a good indication of where things currently stand:

Is there anything else that could lead us out of the recession? Recall that aggregate demand is the sum of household, business, government, and foreign demand for our goods and services. As just noted, households are in no position to help, businesses -- including housing construction -- are also unlikely to provide the needed boost, so what about government and the foreign sector? Can they provide the needed demand? We certainly can't expect expansionary policy from government, if anything the size of government will contract, and with all the uncertainties in Europe the foreign sector is not the answer either. The Fed is another potential source of help, but it's given little reason to expect it will take additional steps to try to simulate the economy.

In short, no matter which sector you point to, government, business, households, or foreigners, there is little reason to expect the large increase in demand needed to drive an economic recovery. Things are looking better, and the green shoots might just be real this time around, but we are still a long, long way from returning to whatever our new normal might be.

[rudrakshabeads]

declination of people out of work and on assistance

[jeannutson]

Next year could be much worse the current improvement seen in the job sector could be attributable to the holiday season after which things could get back to worse.

[banicki]

Before the public will buy into a stimulus the following issues need to be better explained.

1. Given the size of our existing debt can we afford to stimulate, invest, without causing the same problems as experienced in Europe?
2. Given the fact that a significant portion of what we consume is imported from our trading partners, how much will a stimulus increase demand for goods ans services produced in ths country versus imports? Will we be stimulating demand for goods produced by our trading partners?

All Stimulus Is Not Created Equal! http://******/vA5i2U

[tsigili]

Of course not. There can be no turn around until jobs are created, and this administration is doing absolutely NOTHING about jobs.

If anything, it can get WORSE!

[CaptainSmollett]

The stock market and general sentiment will improve in anticipation of Obama's defeat next year, as both are leading indicators.

[rightbehind]

Wall street should be bulldozed.

[SinkingWorld]

Source?

[rightbehind]

It already has. There has been mass exodus to better jobs in my community. The economy has recovered despite the republican economic terrorist. A guy I lease space from is now turning more work away. He has hired but is running out of space for the extra work.

[rightbehind]

Wrong. It's those nasty old socialist big government contracts that created the demand for workers and the mass exodus I am witnessing. It's turning into a laborers market here. I don't live in California either.

Millionaires don't create a robust economy.

A robust economy creates millionaires.

[venusvegasvada]

Turn around for who?

For the Rich and the Corps, it turned around a long time ago.

For the rest of us, no it hasn't and until you start seeing thousands upon thousands of jobs returning from overseas to the US, you will never see the economy return to what it was before.

[randydmyers]

No way. Politics has us under duress due to failure to see the needs of the people.

[antoniof123]

So basically we are screwed!

Gee thanks that helps a lot!