Is The Worst Of The Economic Storm Over? Here's Why Not

Is the worst of the economic storm behind us?

Consider the evidence: the Dow Jones Industrial Average leapt about 7.3 percent this week to its biggest weekly gain since March. Positive earnings or upbeat remarks from Intel, Goldman Sachs, and JPMorgan Chase have contributed to the optimism. During the past five days, stock market bears have been roasted alive.

Yet. And but. There is another side to the story, which is the lackluster state of much of the rest of the economy. Heavy consumer debt loads have not vanished. Neither have the housing market's woes, and still-to-come price declines in many areas. CIT Group's potential demise -- for once, a Wall Street firm that didn't get a bailout -- is further evidence that the plague of financial contagion has not run its course.

On the earnings front, the Wall Street Journal reminds us that analysts predict all 10 of the major industry groups represented in the Standard & Poor's 500-stock index will experience a second-quarter decline in profitability from 2008 to 2009.

A Goldman Sachs report says: "We find that under reasonable parameters of supply and demand growth, it will take at least two years, and probably more like three to five years, to eliminate spare capacity in the manufacturing sector... In the labor market, the unemployment rate is likely to remain above the current concept of 'normal' for an even longer period."

Politicking in Washington isn't likely to aid economic fundamentals. The Obama administration is contemplating a sweeping changes to the financial regulatory apparatus -- never mind that a crop of regulatory agencies, sporting initials like SEC, FDIC, FINRA, OCC, NCUA, FFIEC, OTS, FHRA, and FRB failed to prevent last year's turmoil, and to some extent even aided it through regulatory failure and artificially low interest rates.

There's also the potential for higher taxes as a result of Democrats' plans for cap and trade legislation and health care plans. The conservative Heritage Foundation puts the cost of cap and trade at 2.5 million jobs lost, an average GDP loss of $393 billion a year, and additional increase in family debt at $114,915 by 2035. The Congressional Budget Office's estimates use different assumptions and are lower, but the CBO has said the health care proposal would increase, not decrease costs spent in the area.

All of these pending legal and regulatory changes create uncertainty, and could yield higher taxes, neither of which tends to delight investors. They also produce opportunities for what economists call "rent-seeking," a term meaning seeking favors through the political system at someone else's expense (which may aid the victor, true, but not the general public).

Then there's unemployment. The Associated Press reported Friday that 15 states have crossed the threshold of 10 percent unemployment, and more will likely follow. My (new) home state of California is in especially poor shape; unemployment here is at 11.6 percent, with the state losing 66,500 jobs last month and 766,300 jobs so far this year.

If you think that's alarming, check out the alternate data calculated by a Web site called Shadowstats.com. Using the earlier method of calculating unemployment, which takes into account "discouraged workers," it puts the national rate at just over 20 percent. (Here's more on calculating unemployment rates from John Miller, who teaches economics at Wheaton College in Massachusetts.)

Foreclosures are at a record high, despite the federal government's best efforts to lessen them, and jumbo loans remain difficult to obtain in pricier areas. If you believe that house prices will tend to return to their long-run, inflation-adjusted mean (a heretical concept in some circles, true), metro areas like San Francisco, New York, and Washington, D.C. have a long way to fall.

This is not to say that the U.S. economy is in execrable shape. If anything, we've stepped back from the precipice that was looming in front of us last fall -- at the possible cost of significant inflation once banks begin to lend out the remarkable amount of excess reserves they've accumulated.

But all of this should be a cautionary note. Bubbles don't deflate immediately, economic distortions take a while to unwind, and week-long stock market rallies may provide only temporary hope.

CBSNews.com correspondent Declan McCullagh can be reached via email at declan@cbsnews.com.