Recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding, and consumer spending, including sales of new motor vehicles. A leveling out of economic activity is the first step toward recovery.My guess is that the second quarter of 2009 will not look as bad as the previous two quarters. Housing construction can no longer be a source of contraction, because it has already shrunk so much. The auto sector is unlikely to fall further. Used car prices are rising, and that usually indicates that purchases of new autos will pick up at some point.
On the worrisome side, the stock market seems to respond primarily to news about the banking sector. In my view, that is not healthy, because my guess is that the probability that all the major banks are now solvent is pretty low. It may take a few months, but my guess is that at some point we will see a few big banks get shut down. I also wonder about the outlook for commercial real estate. How many shopping malls are close to going under?
The most difficult part about assessing the economic outlook is figuring out what sectors will produce growth. The economy's health will not be defined by the behavior of its declining industries. It will be the growing industries (or absence thereof) that will determine the rate at which people are able to find jobs.
It is not sufficient to stop the bleeding in housing and autos. A revival of animal spirits somewhere else will be a necessary part of a robust recovery.
Used car sales do nothing to create car mfg jobs. When new car sales do pick up, there is a pretty good chance that most of those new cars are not going to be built by GM, Ford or Chrysler (because a lot of people will be afraid to buy a car from somebody who might go out of business soon). This means that USA car mfg jobs may never recover all the way.
There was a recent survey that said only 53% of Americans believe in capitalism. Wow!
"A revival of animal spirits somewhere else will be a necessary part of a robust recovery".
I will assume that "animal spirits" translates to "investor confidence". According to Rasmussen, investor confidence is pretty low, historically speaking. Things that give me confidence, as an investor, are things like low inflation, low taxes, low regulation/red tape, minimal government interference in the economy, strong legal system, minimally corrupt government. I'm not optimistic on any of those fronts.
In a global economy, the USA has to compete for investor's dollars. It would not surprise me to see the USA gradually become less competitive.