Posted on August 29th, 2010
An extreme dichotomy exists in the American economy today. On the one hand, there is the corporate sector that has seen company profits rise sharply in the past year, with companies undergoing an additional round of increasing productivity, raising capital and increasing liquidity, and in which management is showing confidence. On the other hand, the household sector has only gotten back a very small amount of what it lost in the crisis on housing and in the stock market: unemployment remains very high; job security is low; pensions are depleted; and credit is tight. Their sentiment measures are beginning to fall.
Economic forecasts, too, are suffering from a similar dichotomy. While most forecasters are predicting growth over the middle term of 3% or a little more before the latest employment data came in, and a little less after the data, others are predicting another recession, or even a depression. In my opinion, the probability of a double dip is still less than 50%, but that number is going up weekly, due to erroneous world economic policies in general and those of the U.S. in particular. Even now, the probability of a crash is too high to delay taking additional fiscal and monetary policy steps.