With the new year, many financial writers have posted articles discussing what they expect for the next year. Edward Harrison is no exception. Here are Edward’s thoughts for 2011 at Credit Writedowns. – Ilene
Excerpt:
It’s high time I laid my cards on the table about 2011. I have hinted around my view in previous posts, promising to spell it out in detail. So, here it is: I am cautiously optimistic on the US and global economy for 2011. Let me explain both pieces of the puzzle – the cautious part and the optimistic part – below. I’ll start with the positive first.
Optimistic
Double dip recessions are not the norm; they are the exception. Why? Here’s how I put it in September:
Recoveries by definition start from a point of diminished output because recessions are periods of diminishingoutput. So output in the initial period of any recovery is always lower. That’s how the math works – and also why I continue to stress that this is a technical recovery.
But, the important part to remember is how the business cycle works and how the recency effect creates self-reinforcing declines or recoveries in output.
Increases in income lead to increases in retail sales which lead to increases in output and inventories which lead to more jobs and thus a further increase in income. This is a virtuous circle that defines the upward path of a business cycle.
So, you really need to see powerful secular forces to overcome this self-reinforcing dynamic. Once a technical recovery begins, we should expect it to continue and blossom into a full-blown cyclical recovery. Obviously, I am talking about the medium-term, not the long-term here. But the point is that we have been in recovery for over one-and-a-half years in the US. Odds are that this will continue for some time to come (through 2011 at least).
I see the jobs picture as encouraging. Employment is lagging as it has in the last two recoveries. So the recovery looks particularly weak. Moreover, there seems to be a skew toward the upper income strata. This makes the technical recovery appear even more sluggish. But clearly, the jobs picture is improving.
What are US jobless claims telling us about recovery? They are averaging about 410,000, down from almost 470,000 a year ago. And since employment is a lagging indicator, we should expect claims to drop even further as GDP has been growing.
