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Near-Term Recovery Is Impossible

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Cleansing the economy is creating a vicious circle that will be hard to break.

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Many jobs that were lost will never be recreated. Excess capacity is making companies reluctant to start hiring again until demand catches up with supply. And increasing levels of cheap outsourcing from companies like Infosys (INFY) and Wipro (WIT) are providing further incentives to not hire in the US. According to HIS Global Insight, it could take a decade for our economy to return to the 5% equilibrium level of unemployment.

High Unemployment = No Spending = No Growth

As long as unemployment is high, consumers are incapable of spending to stimulate the economy. In addition, the inability to use debt and new frugal mentality instilled by the credit bubble is adding to the reluctance to spend.

Investors, giddy over the September retail sales data, nonsensically bid retailers like American Eagle (AEO), Pacific Sunwear (PSUN), and Talbots (TLB) up by double-digit percentages over the past few days because of signs of slightly improving sales figures.

While sales declines are being tempered, it will still be many, many years before we come close to reaching the consumption level we had at the height of the bubble.

On one hand, this is a good thing, as both consumers and businesses had overextended their use of debt and spent capital frivolously, which ultimately led to unsustainable growth rates. We needed something to slow us down.

On the other hand, the process of returning to economic equilibrium is going to be a drawn out process. Right now, recovery actually entails reducing jobs to further clean out the excess that had built up. Thus, a period of net job creation can't be expected in the near future.

Bottom Line

Global economic recuperation is starting to materialize in countries like Germany and China. However, with a strong dependence on consumption, the combination of prolonged unemployment and an emerging trend of conservative spending habits makes near-term recovery impossible in the US.

Investors should be cautious with the over-exuberance being priced into the market. It simply isn't possible to return to a healthy state until the workforce begins to grow again, and I think the market is underestimating the dire situation we're currently facing.

Given our country's current unemployment status and the projections experts are expecting, we are a long ways away from being anything more than "stabilizing".

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