With all the talk about ‘green shoots’ of economic recovery its time to ask if these shoots are real or just the immediate result of significant stimulus. The buzz is postive, particulary as companies start to report changes based on YO-YO metrics that show improvement ‘year over year’.
The point of this entry arose from the Page 1 WSJ headline story on Friday August 14th – “Europe recovers as U.S. Lags.” The article discusses that Germany and France in particular are returning to growth thanks to government stimulus efforts. Those efforts, like similar ones in the U.S. such as the ‘cash for clunkers’ program, stimulate the economy by incenting people to act now rather than latter.
This creates the potential that the economy is not really growing, its just responding to the incentives and moving future sales forward. This happened in the fall of 2001 when automakers offered 0% financing to stave off a recession. That worked, but one thing it did was bunch up sales in that quarter and created the trough that contributed to pulling the industry down to its knees.
The WSJ’s Mark Gongloff stated as much in his Ahead of the Tape article on August 13th where he discuses that data on retails sales is being temporarily boosted by actions related stimulus policy.
The relatively slow growth reported by the WSJ in France of +1.4% and Germany +1.3% may not have the strength to maintain momentum beyond the initial stimulus response. There is also the factor that US stimulus of more than $700 billion dollars remains largely AWOL (absent without leave) in the US economy.
I believe the proof that the recovery is real will come in terms of corporate investment and employment not consumer spending which is more sensitive to short-term policy and stimulus activities.
Certainly the companies I have been working with around the world with remain hopeful of economic recovery in 2010 but they continue to see double digit drops in sales and continued operating pressures.
The sentiment is that the economy will recover around the globe, but increasingly people see the recovery not as a return to past levels, but the absence of future revenue declines. This is will lead to an economy that is different than what we had earlier in the decade. We all need to prepare for that.
I hope that I am wrong and that recovery is well on its way. However, its prudent to think about the strength of these green shoots in order to be prepared if economic conditions turn down and the recovery ‘eats shoots and leaves.”