Is the recession over? Has the recovery started?
One lesson of the last few years is that some of our traditional economic labels have lost meaning. According to the National Bureau of Economic Research — the group of academic economists who set dates for the beginning and end of business cycles — the U.S. economy has been in a recovery since mid-2009. That’s when the recession that began in late 2007 is deemed to have ended. But for many Americans, if not most, it hasn’t felt like a “recovery.”
And why should it?
Despite indisputable evidence that the economy is expanding — producing more goods and services, which is the basic test for recovery — economic conditions have been dismal. Overall production (gross domestic product) has passed its pre-recession peak in 2007 by only a meager 2.5 percent. Although 5.7 million payroll jobs have been created from their low point, total employment remains 3 million short of its pre-recession level. Steep unemployment (7.7 percent in February) has kept the share of workers jobless for six months or more (40 percent) stubbornly high.
Although the economy satisfies the technical criteria for “recovery,” it’s still stuck in recessionary territory. Guess which seems real to most Americans? People tend to see the worst. A new Pew Research Center poll finds 33 percent of respondents “hearing mostly bad news,” 7 percent “hearing mostly good news” and 58 percent acknowledging a mix.
Public pessimism also reflects a loss of faith in elites and experts. Economists and regulators both failed to foresee the financial crisis and misjudged the recovery. Here’s how the White House Council of Economic Advisers puts it in its latest annual report: “The administration forecast overpredicted output growth by a small amount in 2010 and by larger amounts in 2011 and the first half of 2012.” Specifically, the Obama administration expected GDP to grow 3 percent in 2012; the actual figure was 2.2 percent. Private forecasts were generally as bad.
Little wonder that old labels seem less relevant. Lackluster growth has left us in a twilight zone. It’s a “recovery” but it’s not; the “recession” is over but it isn’t. Ironically, this mind-set may blind us to a favorable turn of events. There are signs that stronger gains in jobs and output are feeding on each other. To put it differently: Something that looks and feels like a traditional recovery may have started.
The long-dormant housing market is reviving. Home prices and sales are up; homebuilders are increasing production to satisfy rising demand. Personal finances have improved. Loans have been repaid or written off. Since year-end 2009, the ratio of household debt to disposable income has dropped from 130 percent to 111 percent, according to Federal Reserve data. It’s probably still declining. Over the same period, a rising stock market and higher home values have increased household wealth by almost $10 trillion.
The other piece of good news is the job market. “The last five months . . . we’ve seen over 200,000 jobs a month in the private sector,” Fed Chairman Ben Bernanke noted last week at a news conference. “Unemployment [insurance] claims are at the lowest level they’ve been since the crisis.”
So two large sources of middle-class anxiety and insecurity — jobs and wealth — are slowly easing. The share of “underwater” homeowners (with mortgages exceeding the value of their homes) has dropped from 21.2 percent in mid-2009 to 14.8 percent in the third quarter of 2012, reports Moody’s Analytics.
None of this is conclusive. In recent years, bursts of strong growth have often preceded months of sluggishness. “I think one thing we would need is to make sure that this is not a temporary improvement,” Bernanke said. The Great Recession has made both consumers and companies cautious spenders.
Other threats to recovery include: adverse side effects from Europe’s economic turmoil; another destructive White House-Congress budget confrontation; Obamacare’s disincentives for job creation (example: Because firms with fewer than 50 workers aren’t required to provide health insurance, the temptation is to stop hiring at 49). Tax increases adopted this year, especially higher payroll taxes, could also slow growth. The same applies to the spending cuts of the so-called sequester.
Still, we might be in for a pleasant surprise. Having overestimated the recovery’s strength for years, chastened economists may now be underestimating it. They may still be wrong — but this time their error would be a happy one.
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