I don’t know whether the people who are talking about an economic turnaround being around the corner are right, but I think it’s crucial to remember that even if things do turn around soon, that will probably entail things continuing to be bad for quite a long time. Why’s that? Well, one simplified way to look at it is provided by the chart below. It depicts an industry that produces a certain number of widgets each month:
In January, February, and March, all’s well. People are buying 100 widgets per month, so 100 widgets per month are getting made. Then in April, May, June, and July widget sales steadily decline, and production declines with them. But because production declines are slightly lagging the sales declines, an excess widget inventory is building up. Thus when sales start to pick up in the fall, production growth lags behind because inventory is still being worked off. By January, sales are above the old plateau thanks to population growth, but production is still slightly behind where it had been. And since the population has grown, the unemployment rate is still higher than it was during the recession.
Which is to say that even if you’re feeling optimistic, you shouldn’t feel too optimistic.