Recession's Over? Hold the Celebrations

Here is Daniel Gross in Slate magazine pointing out the obvious:

The Great Recession ... is most likely over. Home sales, while still far below the levels of a year ago, have risen for three straight months—a first since 2004. The stock market has rallied 44 percent since March, thanks to renewed optimism and improving earnings from big companies like Goldman Sachs and Apple. In June, seven of the 10 indicators in the Conference Board Leading Economic Index pointed upward, including manufacturing hours worked and unemployment claims. Macroeconomic Advisers, the St. Louis-based consulting firm, says the economy is expanding at a 2.5 percent annual rate in the current quarter. Economic activity "will increase slightly over the remainder of 2009," Federal Reserve Chairman Ben Bernanke told Congress.

Irrational exuberance it's not. But even stagnation would be an improvement over recent history. The U.S. economy shrank at nearly a 6 percent annualized rate between September 2008 and March 2009, a shocking slowdown that pitched the global economy into recession for the first time since World War II. "This looks an awful lot like the beginning of a second Great Depression," Nobel laureate Paul Krugman said in January. Catastrophe may have been averted. But when economists proclaim a recession over, they're celebrating a technicality: They mean economic output has stopped contracting. And while that is good news, you might wait a while before adding Judy Garland's rendition of "Happy Days Are Here Again" to your iPod. GDP growth alone can't feed a family or pay a mortgage. Cursed with a high national debt load and blessed with a dynamic, growing work force, the U.S. economy needs annual growth of at least 1.5 percent just to feel like we're standing still.

Worse, the data point that means the most to our psychological well-being—unemployment—is likely to keep climbing. The loss of 6.5 million jobs since December 2007 has spurred the sharpest rise in the unemployment rate since the 1930s.

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Having survived a near-death economic experience, Americans now need to focus on surviving what's likely to be a pokey, painful recovery. "I see 1 percent growth in the economy in the next few years," says New York University economist Nouriel Roubini. "It's going to feel like a recession, even when it ends." Shifting our unwieldy $14 trillion economy from rapid reverse into neutral took heroic efforts from the Federal Reserve, the Treasury Department (in two administrations), two sessions of Congress, and, of course, the taxpayers. But the greater challenge may be getting the economy to start growing at a pace that creates jobs, boosts incomes, and raises corporate profits—all without triggering inflation.

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It's too soon to judge whether this enormous fiscal and political gamble will work. But as was the case the last time the financial sector destroyed itself—the early 1930s—it will be up to Washington to lead the way. We're witnessing an immense and aggressive substitution of public capital for private capital—and it is probably essential to our recovery. But the best-laid plans of Ivy League academics and charismatic young presidents frequently go awry (see: Vietnam). The stimulus package will work its way into the economy very slowly and, by itself, isn't nearly large enough to make up for all the wealth and jobs lost in the last two years. And there's great uncertainty as to how one of the most crucial components of the smart economy—health care—will be affected.

Those on the right say the Obama plan can't work simply because it's directed by government. (Every Republican in the House voted against the stimulus plan.) But even some on the left say it's aimed disproportionately at industry. In an economy in which consumers account for 70 percent of activity, "what we need is more demand for goods and services," says Lawrence Mishel, president of the Washington, D.C.–based Economic Policy Institute. "The missing pillar in Obama's articulation is really making sure that people's wages rise in tandem with productivity." Critics and allies alike fret about the pace of aid.

I side with the left. There isn't enough stimulus to consumers. Too much of the stimulus money is going into pockets that won't spend it. As Daniel Gross points out:

In his first 100 days, Franklin D. Roosevelt said he wanted 250,000 young men working in the forests for $1 a day. Despite the howls of organized labor, a quarter of a million men were toiling in the Civilian Conservation Corps by the summer of 1933. They planted 3 billion trees, built 800 state parks, and saved the nation's topsoil. Larger public-works programs like the Civil Works Administration swiftly put millions of people to work erecting bridges and building dams.

Things aren't going quite as swiftly in New Deal 2.0. So far, only a fraction of the stimulus funding has entered the economy via tax cuts ($43 billion) and another chunk via aid to state and local governments ($64 billion). Much of that, however, was used to avert cuts rather than to create jobs.

And, in true Hollywood style, Daniel Gross ends with a note of optimism:

Historically, the economy has kicked into higher gear when a development comes along that can touch every part of the economy, not just particular sectors: the steam engine, electricity, the computer chip, globalization, the Internet, cheap money. By definition, it's almost impossible to know what the next disruptive, discontinuous great leap forward is going to be. On several occasions, Lawrence Summers has remarked that when he was involved in the big economic summit Bill Clinton held after winning the 1992 election, he didn't recall hearing many mentions of the words the Internet.

"Past performance is no guide to future returns." That's the disclaimer that every investment manager provides clients. And it's true in economic terms, as well. The United States has historically responded with resilience and flexibility to periods of economic distress. Despite the army of authors dedicated to the proposition that the New Deal was an unadulterated failure, FDR's efforts averted disaster, ended the nation's worst economic downturn, and created lasting infrastructure that has paid economic dividends for decades—from the Hoover Dam to the Appalachian Trail (the real one, not Mark Sanford's fictional one). History suggests, but doesn't guarantee, that the United States is likely to do so again.

Go read the whole article. It has lots of little jewels in it. Lots of details. I enjoy Gross's writings. I think he is heads above most other economic writers.