What Inning of the Economic Recovery Are We In?

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
His recent commentary for dailyfinance.com... "WHAT INNING OF THE ECONOMIC RECOVERY ARE WE IN"?
He says we're in the 4th inning. Will we need the bull pen? Whose our "closer"?

Cohan looks at these key indicators:

* Stock prices. Anyone who owned Dow stocks is now down 38 percent from the October 2007 peak of 14,093. Unless you bought stocks en mass this March 10 -- in which case those holdings are up 32.5 percent -- you are probably still afraid to look at your account statements. And if you bought tech stocks in the 1990s, the NASDAQ is still 63 percent below its March 2000 peak -- nearly a decade later. I think it would be very surprising to see the Dow rise 62.5 percent from here -- a 10.2 percent compound annual growth rate -- to get back to its 14,093 peak by 2014.
* Housing prices. Housing is an intensely local business but prices are down on average about 32 percent from their peak and with 5.4 million mortgages in default or foreclosure, it appears difficult to believe that there will be enough new demand to soak up all the supply that foreclosing banks dump on the market. With banks still needing to write off trillions in toxic waste -- and the 19 biggest in the hunt for $75 billion in new capital -- they are not going to be making loans to anyone but the most creditworthy. This means that it could take up to a decade before all that extra housing supply gets soaked up and prices start rising.
* Incomes. Inflation adjusted median family incomes fell between 2000 and 2007. With six million jobs lost since the Great Recession began, that trend is likely to get worse before it gets better. At this point, there is very little economic growth to reemploy those people. And the recent bankruptcies of GM and Chrysler add tens of thousands more former workers at auto dealers, car factories, and suppliers to the ranks of the unemployed.
* Spending. The current structure of the U.S. economy depends on consumer spending for growth. More specifically, some 70 percent of GDP growth comes from consumer spending. And the most recent statistics suggest that thanks to Obama's stimulus plan, incomes were up 0.5 percent in April although consumer spending was down 0.1 percent as the savings rate spiked to 5.7 percent. This lower consumer spending creates a spiral of excess production capacity, worker/consumer layoffs, and less income available to spend -- hence lower spending as the cycle begins anew.
* Innovation-fueled economic activity. This leads to my last point -- unless we change our economy from one that depends for growth on cutting wages, borrowing and spending to growth through venture-capital fueled innovation, we are doomed to repeat the same mistakes that created the bubble that burst in 2007. If such innovation fueled growth can resume -- and two recent initial public offerings (IPOs) suggest that's possible -- then it could be another decade before we get back to the economic dynamism we enjoyed in the 1990s.

Scott talks with Cohan in this video