Editor’s note: Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy.
RALEIGH, N.C. – There’s increasing optimism the recession will be over by the end of the year. Trends in key economic factors as well as movements in leading indicators are all pointing to that conclusion. If accurate, we can all let out a collective “hooray” when the happy news hits.
But before our excitement gets too high, it’s worthwhile to try to answer two questions: what does the end of a recession mean, and what will the recovery from the recession look like?
A recession means the economy is getting smaller. Sales, revenues, and jobs all contract. Even prices often get smaller by falling. The end of a recession means this shrinkage stops and the economy starts expanding again.
However, just because the recession is over doesn’t mean everything returns to where it was before the recession began. It just means we’ve started to dig ourselves out of the hole created by the downturn.
The second – and perhaps more important – question then is how long will it take for us to recover what we lost during the recession? In other words, what will be the strength of the recovery?
Economists are already debating this question, and the consensus answer seems to be “a long time”. Indeed, the Federal Reserve has already talked about a two-year recovery period before the economy gets back to where it was in 2007.
The main reason cited for the slow rebound is the overhang of debt still carried by households. The tremendous loss in wealth suffered by consumers ($14 trillion, or 22% of the total) in the past two years is making them scramble to limit spending and pay-off debt. Economists think this financial rebalancing won’t stop with the end of the recession but will continue in to the recovery. The result will be a sluggish recovery driven by stingy consumers.
The bottom line is that businesses will have a better year in 2010, but not anything to set records. Consumers will still be careful and cautious. Although more available, credit will continue to be tight compared to pre-recession standards. One wild card will be interest rates. If interest rates rise, either as a result of the Federal Reserve trying to head off inflation or from concerns over government debt levels, consumer spending could be further stymied.
Yet, just as a recession doesn’t impact every person and every business equally, the recovery won’t precede with an even hand. Traditionally, businesses that sell durable products where purchases can be postponed – homes, vehicles, furniture, computers – take the biggest “hit” during a recession. Then, when the recovery comes and buyers exercise their “pent-up demand”, these businesses can see a sharp upturn in sales.
The current recession has had a devastating impact on the sale of durable goods – particularly homes and vehicles. Many think sales can’t get worse than they are. Therefore, any recovery – modest as it might be – should significantly improve the sales of these long-lasting products.
High-end product sales and sales and activities dependent on discretionary income have also been battered during the last two years. Therefore, look for major improvement in the cash register rings for such items as jewelry, business clothing, and even the gaming industry. In contrast, sales at discount stores, bargain restaurants, and auto repair shops will experience diminished gains as the economy improves.
The overriding conclusion is that businesses will have to work harder for their sales even as the economy moves into a new growth phase. The financial and psychological stress created by the recession will remain with us for a while. The “buying spree” by consumers over the last two decades may not return for years, decades, or ever!
The economic pie will again expand, but slowly. Businesses, and regions, will be competing more for bigger slices than for parts of a larger pie. The successful firms will get ahead by the profitable use of management, marketing, and creativity – skills that will be vital and essential like never before. However, many will decide slow growth is better than no growth!
is a William Neal Reynolds Distinguished Professor and Extension Economist at North Carolina State University where he teaches and writes on personal finance, economic outlook, and public policy.
