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Economic Impact: Reasons Why the Recovery is Taking Hold

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Every six weeks or so, my conviction about the strength of the U.S. economy is questioned. That time frame coincides with when I get my hair cut.



Rick has been concerned for years about the impact of greed on our economy. The near-collapse of our financial system in September 2008 gave him some credibility. Last week, I was surprised to hear him say there are bigger problems coming that will cause our economy to collapse.



Of course, I explained all the reasons why the recovery is taking hold. Consumers are spending, and their confidence in future economic growth has risen. The industrial sector is growing. Real gross domestic product has risen for two straight quarters. Most encouragingly, employment in the nation expanded at a good pace in March, indicating that businesses are seeing enough demand to hire. And manufacturing and construction employment rose during the month.



Leading indicators suggest further improvement in the labor market: Initial unemployment claims continue to drop, which indicates that firms are laying off fewer workers. Sure there are headwinds with the tight bank credit and high unemployment rate. Those factors will translate into a slower recovery, but not a stall and return to recession.



The one thing I do worry about over the longer run is all the government debt we are taking on. Rick was glad to find a point of commonality. There are two main ways to reduce that debt: Raise taxes or reduce spending. It appears that federal taxes will be rising, and history shows that higher taxes lead to slower national economic growth. Yet, I don’t see that sending us back into recession.



If the government does nothing to reduce national debt, interest rates will rise. Foreign governments purchase a large chunk of government bonds in this country. What if foreign investors don’t like the path of spending our government is taking? In that case, they will purchase less of our Treasuries. That will cause our interest rates to rise. With higher interest rates, some expansion projects in the United States will no longer be profitable. Higher mortgage rates will slow the housing market.



The speed at which this happens is important. A modest rise in interest rates is expected during the next year as the economy continues to recover. A very sharp and persistent rise, however, likely would send the economy back into recession. Although this dire situation is not in our forecast, I think it gave Rick the support for his convictions just as he finished clipping my hair.



Republished with permission from the Richmond Times-Dispatch

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