Forecasts of Slow Growth May Be Incorrect

Tuesday, October 13, 2009

barometer-1In The Wall Street Journal today, White House economic adviser Lawrence Summers is quoted: “… lack of demand will be the major constraint on output and employment in the American economy for the foreseeable future.” The implication is that the economy faces a long slog to regain its footing. This popular belief in the midst of a weak economy could –once again- be wrong…

After significant economic and stock market declines, I have seen many economists and analysts forecast a slow, prolonged return to normal. Whether these projections are borne of caution or uncertainty, I don’t know – but they are often wrong.

Instead, the stock market rebounds smartly, correctly forecasting a more rapid  return of economic growth. There are three primary causes of this economic rebound:

  1. When the economy’s decline slows and shows signs of bottoming, confidence starts to return. Short-term defensive moves (e.g., drastic spending cuts) begin to be dropped.
  2. Postponed purchases then start to get made, causing sales to further improve.
  3. Then, with confidence returning and sales moving up, an important shift occurs. Businesses, governments and consumers move back to their more natural, desirable mode of operation: planning and acting for the future.

These three drivers can produce quite a heady growth rate more rapid than the long-term rise. The simplistic graph below shows that an above normal growth rate occurs as an item (e.g., sales of computers) bottoms and then moves back up to normal levels.

Sine growth graph

So, ignore forecasts of slow, distant growth. When it starts, growth will likely beat expectations – again.

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