The current prevailing view now is that we are entering a long period of slow economic growth. This view holds that we can expect very slow growth barely exceeding population growth for an indefinitely long period.
It could turn out that way, but it is at least as likely that it does not.
I see no reason why we have to have a Japan style malaise. The slow growth period we are experiencing now is proportional to the magnitude of the original insult in 2008 and to the policy response that leveled the valley and peak. Because of the policy response it is not easy to “read” the middle and end game of this most severe recession. My best guess is that it will be another two years before things return to a normal and higher growth rate.
Why will it be different than Japan?
When analysts talk about Japan they usually cite the aging population, the real estate bubble and policy miscues. I think there are other factors that may be more important.
Japan as an export nation had a relatively small population and domestic demand as compared to their worldwide export base at its peak. When their exports to the world market stopped growing, their excess capital base was much too large in relation to domestic demand. It would take many years to work off that excess against the small base of domestic demand that remained. Another factor is as an island economy it does not have natural resources.
Another factor slowing Japan’s recovery was South Korea and Taiwan and others emerged as competitors for its export markets making it impossible for Japan to grow rapidly once again through exports. With the rise of China a new competitor will emerge in the future further reducing their limits on growth.
Obviously the US has none of these structural factors in common with Japan. It is reasonable to expect the worst recession in 80 years to take a lot more time to generate demand growth than a more typical recession, but not reasonable for it to produce a decade long malaise.
The major problem always cited in the current US economy is the housing market. There are currently no signs, on balance, that housing will turn around anytime soon. This market should improve very slowly over a period of a couple of years.
The automobile market may be the more important marker of consumer attitudes, as it is the second largest consumer purchase after housing. Auto sales will return to health before housing because it is a smaller consumer commitment. In this sense it is a leading indicator for housing. Recent monthly reports for autos are very encouraging. If this trend continues over the next few months it would indicate consumer confidence may be beginning to return. Increases in the auto market should also be accompanied by more subtle increases in housing.
Increased consumer confidence means increases in overall consumption. As businesses see this sustained demand, even if it is not increasing dramatically, but slowly over time, they will begin to increase hiring as we saw last week and continue building inventories. As business confidence further increases, at some point there will be an increase in capital investment. This will stimulate demand for loans and will reduce the grossly inflated cash on corporate balance sheets, and increasing interest rates across the board.
I expect this to take place slowly over a period of about two years. However at some point everyone will realize the dynamics in the economy have shifted and we could see an explosive increase in the economy and the stock market.