by Calculated Risk on 1/04/2010 12:29:00 AM

From Paul Krugman at the NY Times: That 1937 Feeling

The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary ...

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” ... Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.
...
There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

... A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? ... But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery.

A couple months ago I suggested a few possible upside surprises and downside risks to the 2010 outlook, and I suppose the most likely upside surprise would come from consumer spending. As Dr. Yellen noted in November: "Consumers have surprised us in the past with their free-spending ways and it’s not out of the question that they will do so again."

Note: I wrote that post when we though Q3 GDP growth was 3.5%, and I expected Q4 to be about the same. Since Q3 was revised down substantially, I now expect more of a transitory boost to Q4 GDP growth.

And I still think a sluggish 2010 is the most likely scenario. Dr. Krugman's concern is that policy makers will buy into the bullish commentary after a solid Q4, and repeat the mistakes of 1937.