So Are We Recovering or Not? The Answer may Be Up To Us
Up and Down at the Same Time
One of the challenges at the beginning of any economic recovery is reading mixed indicators. One sector of the economy will perk up while another sector takes a downturn. Moreover, most areas of the economy remain stagnant. The average consumer is confused, and investors are reluctant to part with their liquidity.
Last week the jobless rate was reported higher than expected. This week a stronger than expected forecast was given for Gross Domestic Product. This is confusing for the average person. If we are laying off workers, who is making all the new products?
One Step Forward, Two Steps Back
Another troublesome aspect to a recovering economy is false start indicators. Sometimes the public, financial sectors and the government are so anxious for the recovery to start they report information too quickly and tout it as a sure sign of better days to come.
For example, indicators in the housing market are watched very closely. A small rise in new home starts or existing home sales gets a lot of press and attention. However, the next month when the numbers come out these indicators might be lower than they were before. Not only did the growth stop, but the industry actually went backwards. This oscillating effect makes consumers more likely to wait to make a big move and banks less likely to open up credit access. Banks still look at the value of homes as a threat because we are not sure exactly where the bottom will be. Most economists and analysts agree that the fall is slowing.
Money In, Money Out
With the economy slow to recover, the federal government has seen fit to drop or at least hold interest rates low. This should be a good thing for borrowers and stimulate some spending and investing. So why hasn’t it worked yet? There are several factors that diminish the effectiveness of this move, but there are two main factors: restricted credit and return on investment.
Under normal circumstances, lowering interest rates would spur economic activity; however, banks have already cut a good portion of the populous out of the picture with tighter lending criteria. You now have fewer people able to take advantage of the lower rates, thus reducing the effectiveness of the strategy. Secondly, when interest rates drop on money loaned, the interest rates paid to investors drop, as well. People with money to invest aren’t going to move ahead earning 1 percent or 2 percent if waiting awhile may double or triple that return.
When Will We Be All Better?
The key to economic recovery is people being convinced that things will get better sooner rather than later. The individual consumer must see enough positive indicators to have faith in the future and start spending money. This will drive interest rates up slightly and get investors into the picture. Once this happens, banks will feel secure enough to open up access to credit, and the whole system snowballs to recovery.