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The Downturnaround Is Here


The standard measure of an economy is gross domestic product, calculated by adding spending (including government spending) and investment plus net exports. In the fourth quarter of last year and the first of this year, U.S. GDP contracted at an annual rate of more than 6 percent, enough to send shock waves of insecurity through every sector of the economy. The initial pullback was largely caused by a precipitous drop in consumer spending—the combination of a faltering national housing market and the suddenly imploding financial sector turned the formerly hardy American buyer into a wounded beast virtually overnight. Expenditures greater than the cost of a bag of groceries vaporized, causing business investment to plummet and accelerating layoffs. Bam bam bam. You know the story; you lived through it.

But a promising sign emerged in the first quarter of this year, Gordon says. Consumer spending not only stopped falling, it perked up slightly. It wasn’t nearly enough to keep the GDP from continuing to fall, but it convinced Gordon that the economy wouldn’t remain in a tailspin for long. He cites three factors as contributing to stability and positive GDP growth in the near term. The first is the restocking of inventories, which plunged to record low levels as companies slashed production of goods in response to sharply reduced consumer demand. This is one of the basic engines of a normal cyclical recovery. After cutting back too much, companies adjust to their present circumstances and make new orders.

The second factor is real estate. Though prices continue to sag nationally and foreclosures rose in April, there is significant sales activity in the crushed, low-end markets in Florida and California. Whether this is quite the bottom or not, says Gordon, doesn’t matter. What’s important is that the sales are putting people back to work in the real-estate and lending businesses.

Finally, there’s the automobile industry. It’s hard to imagine any good news out of Detroit at this point, but Gordon says it’s coming. Before the recession, annual U.S. automobile sales were about 18 million vehicles. They’ve dropped to half that, an insanely low—and unsustainable—level. At this rate, the average car would have to last 25 years. A typical replacement rate would boost auto sales up to around 15 million a year, and Gordon expects that we’ll start working our way back to that figure this year, buoying the stronger auto companies and putting workers back on the line.

“This is a normal process,” he says. “The economy finds its own bottom. The credit problems are in the process of being fixed.” Yes, American consumers will have to save more and pay down more debts, but this does not lead to breadlines. The financial crisis has been overblown, he believes, obscuring serious problems, like the drug war in Mexico, that will require imaginative, forceful policymaking. Though he expects that the recovery will be slowed by elevated savings rates—because Americans won’t have the value of their homes to fall back on—and that unemployment will take years to retreat to its prebust levels, even the modest improvements will provide a psychological lift. He says he gets the daily e-mail newsletter from RGE Monitor, Nouriel Roubini’s research arm, and he’s noticed a marked “softening” in its tone. “These guys aren’t so sure of anything anymore,” he says. “They had their moment, and they’re going to be embarrassed when it turns around.”

Gordon’s outlook is attractive in its simplicity and lack of pretension. But I couldn’t help but wonder if our present circumstances defy the economic conventions Gordon puts his faith in. Maybe the vast surplus of housing in remote areas of California and Florida will never be fully absorbed. Maybe more people will drive twenty-year-old cars. Sometimes the trajectory of history gets permanently bent.

Gordon discounts these concerns and tries to put me at ease, suggesting that I distract myself from the day-to-day volatility of the market. “The S&P will be over 1,000 at the end of the year”—it’s at about 900 now, dipping below 700 at its lowest—“and we’ll be happily sitting around the Christmas tree,” he says. “It won’t be like last Christmas.”

No, the Recovery Is Not at Hand!

Illustration by Kevin Christy
Gary Shilling  

Economist Gary Shilling’s view of next Christmas, on the other hand, isn’t so cheery. The economy won’t stagger back to its feet, he predicts, until around the middle of next year. And even then, growth will be weak, unemployment will be high, and chronic uncertainty about the future will continue to plague us.

Before you dismiss Shilling as a Scrooge, take a look at the thirteen “investment strategies” he recommended in the January 2008 issue of his newsletter Insight. Remember what New York City felt like then? Bear Stearns was trading at 70 bucks a share. The unemployment rate was below 5 percent. European tourists thronged Soho, slapping down plastic for all manner of distressed denim. Life felt normal, or at least what passed for normal back then.


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