Wednesday, February 25, 2009

What Will Recovery Look Like?

Everyone seems to be predicting this recession will end at some point in the future and we'll get back to growth as usual. I would agree with this. I would, however, also like to know when, exactly, we'll know when things have turned the corner, since it seems with every month that passes, the forecasts for recovery get pushed back another month.

The TED spread is back under control, but that doesn't seem to have changed much, despite how many people were pointing to its height at the first unravellings as indicative of the problem.

We could maybe look at metrics of credit availability, but they aren't exactly showing a ton of movement, particularly when you factor in falling prices. Credit kept growing well into the recession, too, so wouldn't it be a lagging indicator?

As a partial explanation for this (by which I mean more questions), we could think of this mess as two recessions, one from the bad housing market, and an overlapping one from the financial mess. So the credit only follows the second. Really, a lot of the aggregate variables that I wouldn't expect to lag kept following the trend until a fair few months into the recession as defined by the NBER.

I don't think anyone expects government spending to lead the recovery. At least, I hope there's some consensus that ramping up government spending to the point where it brings GDP back to where it would be if 2% per-capita growth continued would not constitute recovery without some serious accompanying enthusiasm from the private sector.

So what do we look at to see that things are getting better? The best indicator I can think of is world trade volume, maybe? Unemployment is too late, same for GDP.

Anyway, I don't have any good answers.

POSTSCRIPT: The St. Louis Fed now maintains a specific data series detailing how much credit has been extended to AIG. Does this mean when the series falls that AIG has just actually used that money?

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