How Will We Know When That Economic Recovery Has Begun?

Today the Economist’s View Blog is answering the question “How Will We Know when the Economy Turns the Corner?”

The answer to the question is when “the private sector [will] be the primary driver of new economic activity”.

What that means is, as explained by the blog, first we would need to know that the banks are being recapitalized with private sector funds that this is happening without the governmental capital encouraging aid programs.

Secondly, we would have to see the private sector non-residential investment improving, another sign that private sector funds are moving back into circulation. The blog says that this hasn't even started heading back upward, though there are signs the decline is slowing.

Some of the other things to improve would be consumer consumption, the stabilizing of the house market, etc..

A warning given by the Economist’s View is that it is hard “to determine how much of the recovery is self-sustaining (as it will be if private sector funds are driving the activity), and how much is being driven by government stimulus programs. If the recovery is self-sustaining, and we are fairly certain of that, then we can begin to carefully wind down the government programs supporting the economy. But if the recovery is mostly due to government stimulus and there is little sign that the financial and real sectors are attracting robust levels of private sector funds, then pulling back on government programs could be disastrous and plunge the economy right back into recession. In fact, in such a case, we may need to provide even more stimulus to fully bridge the gap until the private sector can support the economy on its own.”

When the recovery of the economy begins there will be data that would let people know that the recovery is happening, but if that recovery is due to government spending and not through the private sector, then it is a false recovery.

The blog finishes by writing “we will have a pretty good idea when the economy turns the corner, but it will take awhile to determine why, and we cannot risk pulling back on government programs until we are sufficiently certain that the private sector can support normal economic activity without the government's help.”

Many economists, news personalities and politicians are quick to jump at every opportunity to tell the public that the worse is over and recovery has begun, point to the slow down of the recession as the indicator. We need to remember that it is just the slowing down of the fall that is being pointed out. But we are not done falling yet, the bottom may be close but we haven’t hit it yet.

Here is a link to an article discussing the possibility of the FDIC being bankrupt and even more bank failures to follow http://www.allvoices.com/contributed-news/3932380-is-the-fdic-bankrupt-more-us-banks-likely-to-fail