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December 19, 2005

The State of the Business Cycle

Barry Ritholz thinks the state of the business cycle is weaker than commonly thought. He sees a bunch of people ignoring their transversality constraints--thinking that they can stay suspended in midair forever. He mentions households and the government. I would add all those--private and public--who are holding U.S. long-term bonds:

The Big Picture: Goldilocks Economy? Hardly.... In one camp, the "Realists," and on the other side, the folks who call the realists the "Pouting Pundits of Pessimism." One has to wonder what leads people to take their intellectual cues from the philosophy of Spiro Agnew....

In a typical healthy recovery, Government spending often leads the way.... Pent up consumer demand then takes over.... Businesses ramps up their CapEx Spending and Hiring... a virtuous cycle... overheating, which begets Fed rate hikes, which (typically) go too far and cause the next recession. Then the cycle starts over again....

[T]he sectors contributing to GDP growth are rather atypical at this stage of a recovery. Personal consumption continues to increase - despite a decrease in real income and a negative savings rate.... Business Fixed Investment also decreased last quarter.... 4 years into this recovery, GDP growth it is not a function of increasing corporate CapEx. GDP strength is coming largely from real estate driven consumer borrowing and spending, and from Government deficit spending....

The public hasn't bought into the happy talk either.... Michael Mussa, who served on Ronald Reagan's Council of Economic Advisers from 1986 to 1988, noted : "If you ask the classic Ronald Reagan question 'Are you better off now than you were four years ago?,' a large number of Americans are in fact not better off.'

The American public is hardly a pessimistic lot; they are, however, deeply aware of their own financial situations.

Lastly, a word about Agnew: all his complaints about the "Nattering Nebobs of Negativity" -- Agnew's phrase (via speechwriter Safire) for the critics of his time -- proved completely unfounded. The criticism of the Viet Nam War, President Nixon and Watergate turned out, ironically, to be well founded. Agnew resigned in a bribery scandal....

Posted by DeLong at December 19, 2005 11:28 AM