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Thursday, July 30, 2009

Is The Recession Over?

Some wishful thinking government people are now saying that the recession is over. Don't believe it! There are currently 15 million unemployed Americans and the recession won't be over until that number shrinks considerably. Here's why.

Normally, about two-thirds of the U.S. economy is driven by consumer spending and one-third by industrial spending. Recently, that share exceeded 75% as consumers dipped into their home equity, and did some other borrowing, but that is another story for another day.

What concerns us here is that U.S. consumers have cut back sharply on their spending and have resumed saving some of their income. All of this behavior is good, but the economy cannot begin to grow again until consumers regain their confidence about the future and start spending again. So with 15 million unemployed and, maybe, twice that number seriously worried about losing their jobs, we have about 45 million households making sharp cutbacks in their spending. Since companies watch consumer expenditures closely, they won't start producing products and services to sell to consumers until they see increased spending.

Since there are about 117 million households, in total, in the U.S. roughly 40% of all U.S. households are severely limiting their expenditures. The recession cannot end, and the next expansion cannot begin, until more households begin to spend again. Period.

Watch unemployment numbers and pay no attention to talking heads in Washington. You have a very good indicator of what is going to happen to the economy, and it is better than anything that is coming from Washington.

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