Economics is a science of cycles, and cycles are the very nature of life. Prosperity and growth only follow after the grim periods of recessions. With the stubbornly high unemployment rate frozen at around 9.6 percent for the past two months, the economic outlook of today is dull at the very least, particularly for the millions of Americans who are struggling to find a permanent job while fighting with banks over their mortgage payments. Given that the three years of recession we have all witnessed is the most devastating economic downturn since 1933, however, things can't possibly get any worse.
Ironically enough, finding ourselves at the bottom of this recession is a good thing. In fact, I personally see no argument for why the economy should not transition into the stage of a full-blown recovery in the next two quarters. While this debate will appeal naturally to all the Dartmouth students whose brains operate within the realms of demand-supply equilibriums (i.e. economics majors) the state of the economy has obvious direct implications on the general public.
This claim is essentially a contra-argument to anyone who predicts a double-dip recession, namely those believing that the persistently high unemployment rate, slow job creation and the lack of confidence from consumers as well as investors will contribute to a second consecutive economic slowdown.
In the attempt to refute the double-dip argument and build some empirical ground for conclusions and predictions, I have tracked the behavior of the four components of Gross Domestic Product since 2008. GDP is widely considered to be a solid indicator of economic growth, and serves as a proxy for the state of the economy in this analysis. I have collected data from the Federal Reserve for consumption, investment, federal government expenditures and net trade balance from the years 2008, 2009 and the first three quarters of 2010.
These four components, according to conventional macroeconomic theory, are the direct constituents of GDP; a positive change in these "variables" should lead to a positive change in GDP. An important caveat here: output generally responds to changes in these components with a considerable time lag.
Based on my findings, starting with the third quarter of 2009, GDP has been steadily positive implying that the recession had ended somewhere between the second and the third quarters of 2009. This is consistent with the findings of, well, actual economists. GDP in the third quarter of 2010 was reported to stand at 2.5 percent. Output has apparently responded to the huge boost in private investment which has been rising by double digit percentages in the past four quarters. The rise in investment was caused by the Fed's policy of extremely low interest rates.
Now, considering the aforementioned time lag between GDP and the changes in its variables, I predict that in the next two quarters the economy will be improving even further. But now the shift in production will take place as a result of the most recent 10 percent increase in the net trade balance in the third quarter of 2010. GDP could not have possibly responded yet to the improvement of the trade balance due to the time lag. In addition, consumption and government expenditure are also showing solid gains at 2.8 percent and 4 percent, respectively, based on the third quarter data.
All in all, the expectations on economic growth are quite positive. Since all of the major components of growth are rising, I see no economic reason why the economy should not start fully recovering in the next two quarters. There is little doubt in mind, at least based on these results, that the U.S. economy will avoid a double-dip recession, and instead begin a steady, although doubtlessly lengthy, recovery.
