Economic Review

5/18/09

Why you may hear the economy may appear to be getting better but it’s really not.

Over the next few weeks economic data may appear to be indicating that the worst is over for the economic fallout, and media pundits will take every opportunity to spin such issues as “the rate of decline is slowing…for housing prices, foreclosures, job losses” and this may actually allude to a scenario that things are about to rebound. Reality is however that the economy most likely will not improve for at least another year. Yes, the rates of change in data series may by dropping but that is because the economy has just experienced a massive and drastic contraction (as is illustrated by the drastic decline in GDP and increase in unemployment). It’s just natural that the rate of contraction would slow, otherwise the result would be economic chaos.

A major reason why the economy will not rebound for the foreseeable future is because the past decade’s growth was a result of artificial purchasing power given to US consumers from Stock, Credit Card and Real Estate bubbles. This process has ceased and has no signs of recovering. Without the ability of consumers to augment disposable income by a quick $10,000 to $20,000 a year, outright consumption should continue to sputter and even decrease to a fraction of the pace over the past years.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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