By Frank Ahrens
Washington Post Staff Writer
Sunday, July 4, 2010; G01
Let's say you've got three choices for how the economy's going to fare in the second half of 2010 and into 2011. They are:
A) A double-dip recession.
B) A slowdown in the ongoing recovery.
C) A sustained recovery.
If you want to turn a blind eye to the raft of economic data that came out last week, then by all means, pick Option C. But if you've paid attention and tried to digest the data on housing, unemployment, consumer behavior, stock market activity and overseas turmoil, you'd have to lean toward Option B. And an increasing number of people are starting to warily eyeball Option A.
Let's recap what we learned about the U.S. and global economy over the past week and try to figure out where we stand, now that we're halfway through 2010, as we prepare once again to celebrate our independence from a nation that has deficit problems of its own, but was at least wise enough to stiff-arm the euro:
-- On Friday, we learned that the U.S. unemployment rate for June dropped to 9.5 percent from 9.7 percent in May -- but don't fixate on that. Also, 125,000 jobs were lost in June, but don't concentrate on that, either. The reason: About 225,000 temporary census jobs were eradicated last month. Until the decennial count ends in the fall, the hiring and firing of temporary census workers will be the biggest influence on the nation's employment, like a big jobs accordion. Here's the Friday number you need to focus on: 83,000. That's the figure for jobs created last month in the private sector, i.e., not created by government money. It's true, that figure is up from May, but it's below what forecasters expected. More important, it's below the number of private-sector jobs that need to be created each month -- 125,000 -- just to keep up with population growth. The Great Recession probably ended a year ago, but private-sector employers, still worried about the near future, largely refuse to hire.
-- Thursday brought this stunner: Sales of existing homes in May dropped 30 percent from April, more than twice what everyone expected. Reason? Remember that $6,500 to $8,000 home-buyer tax credit that the government was handing out? It expired April 30. The message is clear: The tepid housing recovery we've seen over the past year was supported by government hand-outs, not market demand.
-- On Wednesday, stocks ended their worst quarter in more than a year. For the second three months of 2010, the Dow Jones industrial average was down 10 percent, and the broader S&P 500 and tech-heavy Nasdaq were each down a stunning 12 percent. By week's end, it only got worse. It is now clear that the stock rally, which began at the March 2009 bottom, ended in late April of this year as investors leave the market for the relative security of U.S. Treasury bonds and other safe harbors.
-- On Tuesday, we learned that consumer confidence in May fell off the table, dropping nearly 20 percent compared with April. This is not surprising, given the turbulent stock market and high unemployment rate.
-- On Monday, consumers telegraphed their lack of confidence in spending numbers released by the government. Consumer spending in the U.S. remains weak: It is increasing at half the rate it did in the months following the recession of the early 1980s, the second-worst downturn of modern times.
What does all of this tell us?
I started with Peter Boockvar, equity strategist at Miller Tabak.
My e-mail was short: "Double-dip or slowdown?"
His response was equally abrupt: "Depends on who wins Nov. elections and what taxes get hiked in 2011."
The tax cuts enacted by President George W. Bush expire at the end of this year. President Obama has proposed extending those cuts -- except for families that make more than $250,000 a year. If Republicans win Congress in November, it's a good bet that the wealthiest Americans will keep their tax cuts. If the Democrats hold the Hill, it's unlikely.
"Our fragile economy CANNOT handle any tax hikes whatsoever, particularly on capital and the income of those who invest, save and spend the most," Boockvar wrote, meaning those American families that make more than $250,000 a year. The all-caps are his, but the feeling is shared by many.
I followed up with Boockvar, and e-mailed: "You notice one of my choices was not 'sustained recovery.' "
He wrote back: "Sustained certainly a ways off."
There are those who believe that what we're going through right now is a natural pause in recovery, of the sort we've seen before. In an interview with CNBC on Thursday, former Federal Reserve chairman Alan Greenspan said as much. At the same time, he acknowledged that the recovery has hit what he called "an invisible wall."
The wall is plenty visible to lots of people. Businesses are uncertain about the effects of the financial regulatory reform bill heading toward passage. They worry about new taxes. They see the financial turmoil and spreading debt contagion in Europe. And they wonder about a slowdown in China's growth. If you were a corporate manager, would you look at all of this data and start hiring new employees, making capital investments and taking out loans to expand your firm?
Mizuho Securities USA chief economist Steven Ricchiuto sees "an economy losing momentum at a fairly rapid pace."
"Let's face it," wrote Bernard Baumohl, chief global economist at the Economic Outlook Group. "This has not been a good week for economists who believe the U.S. economy is on the rebound and that the fundamentals of the recovery are getting stronger."
Finally, there are those arguing that we need an Option D for what's ahead, as in D for Depression. New York Times columnist Paul Krugman predicted such a thing last week, saying we're in for a long period of high unemployment and deflationary contraction, with wages falling and businesses failing. Krugman draws comparisons to the Great Depression, to be sure, but also sends us to our history books to remember the Long Depression that began with the Panic of 1873, saying the coming depression will be more like that one.
Disclosure: Paul Krugman has a Nobel Prize in economics and I, um, don't. But let me point out two things: The fastest that information and capital could move in this sprawling nation in 1873 was about 80 mph -- the top speed of a steam locomotive. When bad times hit back then, they tended to settle in for a good, long time.
Second: When you read Krugman on economics, you need to read him through a filter. He believes that the $787 billion government stimulus approved last year was not enough to really kick-start the economy and that much more is needed. You can correctly read many of his columns -- including this one -- as arguments for more taxpayer-funded stimulus. So just know that.
We have been in recovery for more than a year -- wobbly, furtive and paper-thin as it is. But the bam-bam-bam of last week's data boldly illustrate something we've really known for months now: This recovery has been fueled by government money. And eventually that runs out.