By Neil Irwin
Washington Post Staff Writer
Tuesday, June 2, 2009
Economists, senior government officials and ordinary consumers are all showing greater confidence in the outlook for the economy.
But three months after signs of hope emerged, the evidence of improvement still exists only in the form of glimmers. A slew of recent economic data and other news, including yesterday's bankruptcy filing by General Motors, make clear that the nation is still muddling through a deep recession.
"A few months ago, the U.S. was in the throes of the most severe recession since the 1930s," said Paul Ashworth, a senior economist at Capital Economics. "We've had some improvement, but . . . we're still nowhere near a meaningful recovery or even a slight recovery."
There are unquestionable signs of economic progress -- stabilization of the financial system, for example, and surveys showing that both consumers and businesses are more confident about the future. But those developments have not been enough to offset profound shifts in the U.S. economy. Consumers are trying to live more within their means, and businesses are still cutting jobs and investment spending as they try to work off the excesses of the boom years.
Financial markets have rallied sharply on promising economic news -- including yesterday, when the Standard & Poor's 500-stock index rose 2.6 percent, to its highest level this year. But the economic news has hardly been uniformly positive.
Even many of the more upbeat indicators come with caveats that make them less than impressive. Yesterday, for example, the Commerce Department reported an unexpected 0.4 percent jump in personal income in April. But the reasons were hardly confidence-
inspiring: The increase was driven in part by a $25-per-week boost in unemployment insurance benefits.
The same report showed that consumer spending fell in April as Americans began saving more. The savings rate rose to 5.7 percent of disposable income, the highest since 1995 and up from 4.5 percent in March.
In a separate release, the Institute for Supply Management's survey of manufacturers revealed more encouraging news than economists had expected; in particular, new orders are growing slightly. But the group's overall index of business activity still indicates that the nation's manufacturers remain in a contraction on par with some of the worst months of the 2001 recession.
The continuing troubles in the auto industry, most notably yesterday's bankruptcy filing by GM, could add further to the nation's economic distress. The company is expected to cut 25,000 jobs by 2010 as it closes more plants and eliminates several brands. It is also shutting down about 40 percent of its dealers. Suppliers will be forced to retrench.
President Obama, in a televised address, characterized those steps as necessary to clear the way for a more prosperous long-term future for the U.S. auto industry. He also acknowledged that those steps would require sacrifice.
"Difficult days lie ahead," he said. "More jobs will be lost. More plants will close. More dealerships will shut their doors, and so will many parts suppliers."
While those steps will undoubtedly be painful for the industry, analysts are hopeful that the consequences for the U.S. economy will not be catastrophic. Economists have already built into their forecasts a steep auto-industry contraction.
"They had to do this," said George Magliano, who tracks the auto industry for IHS Global Insight. "The bottom kept falling out of the market, so there was no way to get around cutting plants, and when you cut plants you cut jobs." The GM bankruptcy, assuming it is as quick and "surgical" as the Obama administration intends, "seems like it will preserve more jobs in the U.S. than not," Magliano said.
Mainstream economists generally believe the recession will end -- meaning the economy will stop contracting -- sometime in the second half of the year.
Among the arguments in favor of that view: The recession is already the longest since World War II, the financial system is stabilizing, the Federal Reserve has cut a key interest rate to near zero, and a program of federal spending and tax cuts is beginning to have an effect.
But even many optimists believe that the economy will recover slowly and that the unemployment rate will keep rising well into 2010.
Recent economic data have supported those forecasts. Last week, for example, the Commerce Department reported solid growth in orders for durable goods in April, but simultaneously reported that March orders were much worse than first thought.
The number of new claims for unemployment insurance benefits have been only slightly lower in recent weeks than at the
beginning of the year. There have been at least 600,000 new claims for jobless benefits every week since late January; by contrast, the peak following the Sept. 11, 2001, terrorist attacks was 517,000 claims.
"We're not improving yet," said David Wyss, chief economist at Standard & Poor's. "But we're not getting worse quite as fast."