Friday, December 23, 2011

The Great Recession In The US And The Slow Recovery

This graph illustrates how the economy responded to financial crisis and it shows how weak the recovery has been. In the recent past, recoveries have been V shaped. This recovery is L shaped. There was a slight jump due to the stimulus but it was weak and short lived. The decline in state and local spending muted much of the growth in federal spending. Household deleveraging, and a decline in consumer confidence, continues to have a negative effect on consumption. That, in turn, affects business investment.

Some argue that the real estate bubble masked a longer term trend of slow growth in real household income. The bursting of the bubble has made that trend visible as well. Part of what we observe is a regression to the unfavorable trend that was obscured by the use of rising home equity and mortgage refinancing during the bubble to stimulate spending.

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