On NPR this morning, one of their commentators was speaking about the economic recovery. It got me thinking. I’m currently overeducated and unemployed. It’s difficult to find well-paying jobs where I live. I’ve been doing temp work, but even those assignments are far and few between–and summer is usually a good time to pick up temp assignments. I have a number of college-educated friends in the same boat. In addition, factories in my state are closing, and ex-factory workers are having a devil of a time finding decent jobs. The state government has no money, and has withheld funds from county governments. The county is slashing their budget in response to this. From my perspective, things aren’t too rosy on the economic front.
So how do economists measure the state of the economy? What factors go into that consideration? If the economy is recovering, when can non-stockholding John and Jane Doe expect to benefit?
We had a big runup, in fact it was a classic bubble in the case of many tech stocks. When such a runup occurs, there’s got to be a lot of bloodletting to balance it out. I.e., it overshot high and now it “has to” undershoot on the low end.
Many of the tech companies have done the necessary blood letting. (Fun fact: Dr. Koop[.com], once with a market cap. of $1.3 billion just sold for $180k. A surprisingly large amount.) Now it’s time for the other companies. But presumably not so much blood to be spilt.
The general stock market refused to take the necessary dive in order to recover “properly”. Now it is. When you see stocks in general going down for no reason then we are at “the beginning of the end”. It’s not a recovery yet, but at least it is now close. Maybe 6 months before it begins, 9-12 months before it dawns on people that it has already begun.
This is assuming there are not a lot of Enron/WorldCom class events to take place. If 5 more of the top 25 companies get hit like that, then we might actually see a full blown depression.
Note that many economic experts (but not all) are out of touch with reality. Many are blissfully unaware of the unemployment situation that is developing. Job-wise, things are much worse than they think. This is not good.
Keep in mind that these cycles are strongly driven by psychology. When people think the economy is getting stronger, it will. The Dow Jones affects people’s attitudes completely out of proportion to its make-up.
I agree that the economy has been in the toilet for the some time, and yet all I hear about on the news in this world of shit is how there’s “all this wonderful fertilizer around to make things grow”. I suspect it’s because they focus on certain regions and sectors.
Despite all the layoffs, for some reason, construction is still huge here in San Diego and in other parts of the country. All kinds of housing developments are springing up everywhere around here and getting top dollar from people who I would have thought would be reluctant to take on a huge mortgage payment if their job was unstable.
Also, look at the defense and aerospace sector. With a republican president in office, this industry automatically gets a boost. Add a terrorist attack and a whole new department (of Homeland Security) to the mix which provides all kinds of new defense contracts, and suddenly you have huge growth in one sector to the exclusion of others.
Now, become an economist/ optimist, put on your blinders, and focus on these facts to the exclusion of others and all you have is good news…and blue skies…
Thanks, Yarster and ftg. It may be that North Carolina is just in a particularly bad way right now. And I suppose economists get treated more nicely when they say everything is peaches and cream. Sort of like the weatherman doesn’t want to predict hail and blizzards.
Could someone explain just what is so bad about the fundamental of the economy (as opposed to the valuation of the stock market - a different thing). Because when I look around, I see low inflation, low interest rates, unemployment rates that used to be categorized as ‘full employment’, and all kinds of new technologies poised to improve efficiency and health.
Just what is so bad? When I finished high school, unemployment was 14%, inflation was 18%, interest rates were 21%, the economy was in recession, and governments throughout the world were engaging in heavy deficit spending.
Today’s economy is one of the healthiest we’ve ever had.
There’s a lot of overcapacity and some debt to be cleared. And low consumer confidence is part of it.
Looking at the bigger picture, the classic answer to burundi’s question is that employment levels and tax takes are the last indicators to rise when an economy is coming out of a slowdown. Companies typically cut all sorts of other things (bonuses, inventories, overtime, marketing budgets, free coffee for staff, etc) before actually laying people off. Only after increasing production, offering more overtime, etc, do they actually start hiring new people again. Then the people start paying more tax.
Sam Stone makes some good points. The answer is psychology, corporate and consumer. A lot of most standard business cycles is based on cycles of perceptions. Because most people’s perceptions are not completely in synch with reality, you get overoptimism which causes unrealistic highs (e.g., Internet bubble) and pessimism that causes lows to be overly severe. People (and companies) buying on credit drive the economy a lot and when they think things are getting worse, that dries up a lot. Such things have multiplier effects.
Sometimes there are other events that muck up the business cycles, e.g., wars. Look at the price of oil and compare it to inflation, etc. over the the last 30+ years. That’s been the #2 effect on our economy. Jimmy Carter inherited a bad oil price situation => inflation => economic problems. He reduced oil imports and other people got credit for the economic benefits it produced. Oh well.
But in the main the excesses in ups and downs are human psychology. “Irrational exuberance” was not just a catch phrase. We are getting into “irrational melancholy”.