Economy really not as bad as it looks

Kai Ryssdal Aug 12, 2009
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Economy really not as bad as it looks

Kai Ryssdal Aug 12, 2009
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Kai Ryssdal: Today the Federal Reserve said the economy is leveling out, as Steve Henn told us at the top of the broadcast. After months of hearing that we’re right on the edge of disaster, optimism sort of looks like a tough sell right about now. Still, there have been ripples of good news the past couple of weeks. Our senior business correspondent Bob Moon is here to say it just might add up to a stronger economic recovery than anybody expected. Bob, how so?


BOB MOON: Well, Kai, what if I told you that it’s just not as bad as it looks. A lot of experts I’ve been talking to say that’s the case. They argue one of the reasons the economy plunged so hard and so fast was less because of real fundamental reasons and a lot more about fear and doubt. And last week’s GDP figure seems to back them up.

RYSSDAL: Gross Domestic Product, the measure of economic growth.

MOON: Yeah, the reading from early this year was revised sharply downward from the initial estimate. And that really shows us now that companies slammed on the breaks so fast, they cut production suddenly in a panic, that the bottom just fell out of the economy. Jim Paulsen at Wells Capital Management argues that businesses and consumers have basically been frozen in fear.

JIM PAULSEN: Because we froze healthy consumers, and they stopped buying cars, and houses, and other things for a while. Now they have pent up demands that went unmet for a year. Because businesses cut payrolls and capped spending so severely preparing for the second coming of the Great Depression, if we don’t have one, they’re going to have to rehire a lot of these people again.

RYSSDAL: I’m going to assume you’ve come equipped with specifics here, Mr. Moon. So hit me.

MOON: Yeah, case in point, Cash for Clunkers.

RYSSDAL: And that Cash for Clunkers was a big stimulus for the auto industry, yes?

MOON: That’s right.

RYSSDAL: I’ve also heard, though, that a lot of people think what’s going to happen is car purchases will fall off the cliff in a couple of months because all that stimulus has been spent.

MOON: If that’s the case, though, why would Detroit be talking about boosting production even more than it already has. Here’s one interesting little tidbit I turned up. It turns out they need to supply rental car companies and other fleet owners, like the government, they’ve been holding off longer than usual in replacing their aging vehicles and now it’s time.

RYSSDAL: Spread that out for me, though, into the wider economy.

MOON: Well, the auto industry has traditionally helped lead the country out of recessions. This is where you need to start connecting the dots. Alcoa, the country’s biggest aluminum producer, was talking optimistically just a few weeks back about U.S. vehicle production rising by one million compared to the first half of the year.

RYSSDAL: Alcoa, a big component of cars.

MOON: That’s right. You can probably guess then why they can’t wait. And then take a look at CSX, which is the country’s third biggest railroad. CSX said the other day that the automotive shipments would contribute to second-half increases in freight. You can read that to mean more jobs.

RYSSDAL: But what about all these predictions we’ve had of unemployment rising above 10 percent before we’re in the clear.

MOON: Well, that doesn’t necessarily rule out a recovery. That’s typically what happens coming out of a recession. Let me take you back to the last time unemployment was this high, back in 1982. It hit 10.8 percent. But even then the U.S. economy grew at an average annual rate of almost 8 percent, and it did that for a year-and-a-half.

RYSSDAL: Demand side, though. Consumers, we are not spending. We’ve seen that time and again in the monthly reports. What do you do about that?

MOON: Well the other side argues, OK, we haven’t been spending. But we can. We’ve been saving more actually. And that might indicate that we have the money. We just haven’t been putting it out.

RYSSDAL: OK, so on the theory that your theory is right. What about all the economists out there who say it’s still really, really bad.

MOON: Well, one expert told me that he thinks the government did such a really good job of scaring the jeebers out of us that this recession has creating what he called a legacy of doubt. And that may be the case. History shows the deeper the recession, the stronger the bounce. And some people are now wondering what’s different this time around. Why should this time be any different? Even coming out of the Great Depression the U.S. economy did grow quite substantially.

RYSSDAL: Before it fell again.

MOON: Well, that’s true. And that’s a really, really big caveat here. Once the bill came due after the Depression, the economy got dragged down again. And there are a lot of experts who are worried that we could see that history repeat itself, too.

RYSSDAL: Our senior business corespondent Bob Moon on the shape of this coming recovery. Thanks, Bob.

MOON: Good luck, Kai.

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