Cycling Up and Down Hill

Some sound sense from Brad Delong that I very much agree with.The only small quibble would be to talk about business cycles here. Of course, in the last analysis, everything has to do with business cycles. The question is which one (cycle I mean) do we focus on. There is more than one rhythm out there. So reference to the cycle here may appear to answer a question when really it poses one. My problem is one of 'over generality'. Economic systems appear to function on a circular causal chain that links Expectations-Investment-Demand (not necessarily in that order). Brad nicely describe the loss of steam we are experiencing, and the deflationary implications it has. But for this negative re-inforcing loop to break something has to change: now the interesting question is what? (suggestions welcome).

A comment on the U.S. economy, on the striking difference between the output picture and the jobs picture. Because of the rapid pace of business reorganization and of investment in IT--investment which has continued through the recent recession: the quarter just past saw real investment in computers and peripherals (but not in telecom!) 26% above its previous summer 2000 peak, and real investment in computers and peripherals has been growing at 24% per year since its summer 2001 trough. You in Silicon Valley aren't making much money: competition's too fierce, and prices are falling too fast. Your customers, on the other hand, are cleaning up: buying lots of very good stuff very cheap. This pace of investment drives labor productivity growth at a remarkable pace, a pace so fast that we need real GDP growth of almost 3.5% per year to keep unemployment steady. We are not going to get that in 2003. Thus whether you are optimistic or pessimistic about the near-run business-cycle future of the American economy depends not on differences in forecasts but on what you focus on: if you focus on production, you think we are in recovery; if you focus on unemployment, you think we are clearly still in recession--and are going to stay in recession this year.
Source: Semi Daily Journal
LINK