Is the Recession Over?

The media seem too eager to proclaim the recession over. Since so many were late in reporting the unfolding recession, there is an understandable urge to not be left behind in proclaiming its end. But are those who didn’t see the recession coming any more correct now in saying they’re seeing it go? Probably not.

Just 17 months ago, the prevailing mood was still that recession would be avoided. In December 2007, then-Congressional Budget Office Director Peter Orszag stated: “Most analysts currently believe the economy will avoid a recession but will grow relatively slowly for several quarters.” Orszag — now in the White House as Director of the Office of Management and Budget — isn’t standing up and proclaiming the recession’s end. But the prevailing mood of many in the media is that the "greatest financial collapse since the Great Depression" is already over.

Even if so many had not already missed by so much, there are still ample reasons to question a recovery. For one thing, as the latest unemployment results show, most of the recovery’s indicators are in the nature of falling down stairs more slowly. Friday’s employment data was applauded because only 345,000 jobs were lost in May — about half the rate in each of the past six months — even though the unemployment rate jumped from 8.9 percent to 9.4 percent.

And if the recovery is here, it is victimized by faint praise. Listen to CBO’s take on the predicted recovery late last month: “The growth in output later this year and next year is likely to be sufficiently weak that the unemployment rate will probably continue to rise into the second half of next year and peak above 10 percent.” Ultimately the unemployment rate will fall “to the neighborhood of 5 percent seen before this downturn began, but that process is likely to take several years.”

The positive news is very relative, as CBO points out. “…The sharp reductions seen in manufacturing production will keep inventories to leaner levels than would have occurred otherwise, so that upturns in sales, when they come, will lead to faster and larger increases in output.”

And the sound of this one hand clapping is muted. “…Many factors will temper the strength of the recovery: the loss of household wealth; the fragility of financial institutions; persistently weak growth in the rest of the world; a surplus of housing units on the market; and low utilization of manufacturing capacity.”

Little wonder that the consensus for private-sector growth forecasts is for the economy to shrink 2.8 percent this year and grow just 1.9 percent next year.

Why still so glum? Many reasons.

First, the drop defines the recovery to some extent: the bigger the reversal, the more robust the recovery from the reduced base. If someone loses half of a $100,000 investment and then regains $10,000 of it, that’s a 20% recovery — yet the individual is still out $40,000. It took eleven years for the economy to reach the level it held before the Depression — and even then it was due to 1940’s massive pre-war production — but it was recording "gains" from its depths as it did so.

Even once the economy starts to grow, it likely will do so on a lower trajectory than previously. For one thing, consumers have substantially "de-leveraged" and this will pull down consumer spending. Credit will be more difficult to obtain and impossible for some. This means less demand and consumer demand is the driving force in the nation’s economy. If you were building houses for people who now won’t be able to get financing, you won’t be building those houses.

Even if not barred from credit, many will be less reluctant to use it. Behavioral changes are real and extend beyond the causal event’s duration. Anyone who has known a Depression survivor realizes their view of credit and saving is very different. Now many Americans have had their own negative experiences and we can expect that they will react accordingly.

Other economic headwinds are likely too. The recession has kept both interest rates and fuel prices low. Expect both to increase as real recovery begins.

But what about the stock market rebound, isn’t this an indication that the recovery has already begun? Remember that even the stock market’s current upswing is still just flirting with putting it into positive territory for this year. Again, the Depression is illuminating. There were several stock market “recoveries” during the Depression. Each must have looked like a rally at the time — its climb from 1934 into 1937, only to plunge again 1938. Still, the stock market did not regain its 1929 peak until the mid-1950s — a quarter of a century later.

Beware the swinging pendulum of prognostication. The signs for recovery are mixed, the past is cautionary, and future growth rates are likely to be reduced from what they had been.
While we still can’t be sure we’re not going in reverse, or at least stuck in neutral, we can be sure that we won’t be slipping behind the wheel of our old V-8 economy when it does start. We will be driving a 4-cylinder for some time, which means it’s going to take us a lot longer to go from 0 to 60 than it used to…and to get us where we had wanted to be.


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