Thursday, November 5, 2009
Private-sector led recovery now beginning
In the absence of any private-sector led demand over the past year or so, gauging the economy based on Government money flows was relatively easy because that was the only factor to consider.
But since gov't tends to to "prime the pump" (by restoring non-governmental incomes and savings via spending) over long periods of deficit spending, there comes a time when private sector demand begins to grow on its own.
I think we are reaching that point.
In one sense this makes the job of forecasting the economy a bit more complicated because gov't "involvement" in terms of the percentages of gov't spending, deficits and such, relative to GDP, actually start to shrink. Rather than being the "money pump" that it has been, over time the government becomes more of a siphon as more fiscal drag is applied. (Tax revenues increase in a growing economy faster than the gov't can spend them.)
However, we are nowhere near a level that would concern me at the present time and deficit spending is likely to continue for a while. Moreover, private sector savings are still relatively high and if job growth resumes, private sector wages will rise.
In addition, from a psychological perspective a private-sector led recovery represents a huge potential positive. That's because most people, including our policymakers, are fundamentally opposed to gov't involvement in the economy even if it is there only to sustain output and employment at the most base levels.
On the other hand, demand and employment that is being driven by the private sector would get people excited and they would start to view the recovery as sustainable whereas they saw the government's contribution as unsustainable (even though it could have been sustained for as long as our leaders wanted it to be.)
So if my assessment is correct, we could now get into a "sweet spot" in the market as so many skeptics begin to throw in the towel on their bearish outlooks.
Admittedly, one very important set of supports (the gov't) may begin to ease off, but the private sector's own momentum will take the baton for now, which for most people, will look like a welcome relief.
Enjoy the ride!