Could the economy actually recover too fast for its own good?

After years of poor economic data, it looks as though a near V-shaped recovery is under way by many measures.

It was expected the economy would eventually recover from the recession; however, the extent to which it would recover and the pace it would recover at were unknown.

Recent data out of the housing and manufacturing industries along with broad-ranging growth measures are indicating a steep recovery has begun.

One need look as far as housing data in recent years to understand how serious this recession has been. However, data in this sector appears to be turning the corner.

New home sales are now up 58% at an annualized rate. This piece of data released by the Department of Commerce has been on the rise after bottoming in January at 301,000 new home sales.

Data for July and August now has new home sales at 433,000 and 429,000, respectively. The Case/Schiller 20 City Index, which measures home values in the 20 largest metro areas of the United States, is up two months in a row. This data points toward the recovery of the weakest industry from this recession.

The manufacturing industry of the U.S. is the largest in the world. It is equal in output to China, Brazil, India and Russia combined, with 20% of the manufacturing output of the world.

The Institute of Supply Management Manufacturing Index has held above the important threshold of 50 for two consecutive months — the first time since September 2007. This integral measure of manufacturing activity has bounced from its low of 32.6 back in December.

A reading above 50 indicates growth in the U.S. manufacturing sector, while a reading below 43 indicates a recession. The U.S. manufacturing industry as a whole is rebounding nicely; however, specific sectors in the manufacturing industry may continue to struggle.

There has been one laggard in the economic data, though: labor data. Unemployment continues to climb, as it now stands at 9.8% for September, up from 9.7% in August. The Civilian Unemployment Rate has climbed 15 of the last 17 months. Our economy still lost 263,000 jobs in September.

Weekly jobless claims data appears to be on the downturn after peaking in spring of this year. However, the weekly number of initial applicants for jobless claims remains well of 500,000.
Labor data tends to trail other economic data going into a recession and going into a recovery. It is very likely that by the beginning of 2010 we will see the trend in labor data reverse and begin to reflect a strong recovery much like data in the areas of housing and manufacturing.

The idea of a V-shaped recovery sounds incredible, especially given the economic hardships many people and businesses have felt during this recession. Yet the very idea of a V-shaped recovery is scary. Any change in economic growth should be gradual, not extreme. It is quite possible the recovery will be at too fast a rate which could result in economic issues in the future — most likely in the form of inflation.

The economy stands the chance of overheating during this recovery. It will be very important for the Federal Reserve to remain vigilant and be ready to raise interest rates appropriately to avoid a serious inflationary period. It may also be wise for the national government to curb its spending as the U.S. dollar my get pounded during this inflationary period.

Richardson’s column runs each Wednesday. He is a teacher at Floyd T. Binns Middle School.