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Is the Recession Really Over?

Bank of America/Merrill Lynch published a provocative report this week declaring that the recession is over. After six quarters of negative growth it would be about time. The evidence, however, isn't uniformly positive and suggests that the downturn still has some distance to run. Here are some of the main points on both sides.

"Our global economists believe that the global recession ended in [the second quarter] of 2009 and a fragile recovery has begun in the third quarter," the BofA report said. "We are revising growth forecasts up virtually across the globe, but most notably in the U.S. and China."

The bank raised its growth forecast to 2.7 percent for the second half of 2009 and to 2.6 percent for 2010. Global GDP growth was set to grow 3.7 percent, the bank said, while emerging markets experience a 5.5 percent rise, the bank said.

Before you break out the champagne, it is good to remember that the Federal Reserve issued its own forecast that 2009 GDP would shrink between 1-1.5 percent, an improvement over the previous range in April of 1.3-2 percent.

It's true that there are some positive signs in the economy. The S&P 500 is up 34 percent from its 12-year low on March 9. That's a sign that professional investors expect the recession to be over soon.

Intel, the world's largest chipmaker, reported profits had soared to 18 cents a share, compared with analysts forecasts of only eight cents. "Intel's second quarter results reflect improving conditions in the PC market segment with our strongest first to second quarter growth since 1988 and a clear expectation for a seasonally stronger second half," said Intel CEO Paul Otellini in a statement.

There were even some good signs about housing. By one measure, U.S. house prices increased 1.6 percent in May, which is a positive development, even though that level is still down 10.5 percent compared to last year. Even in the south, the hardest hit by the housing crisis, prices rose 1.1 percent, according to Integrated Asset Services.

Shares of homebuilding companies even increased in value as some analysts predicted a bottom to the housing market. "There are more positive signals and developments for housing and related industries now than at any time previously in the downturn," said Fitch Ratings analyst Robert P. Curran.

But there are equally strong signs that the economy is still in trouble.

Let's start with the Federal Reserve, where the minutes of the Federal Open Market Committee from late June were published this week. "Most participants saw the economy as still quite weak and vulnerable to further adverse shocks," the report said. "Conditions in the labor market remained poor, and the unemployment rate continued to rise."

On the unemployment front, billionaire investor Mortimer Zuckerman wrote a piece for the Wall Street Journal in which he said the unemployment picture is much worse than the official numbers suggest. He put the total unemployment rate, which included people with parttime jobs due to the slack economy, at 16.5 percent. He expected unemployment to remain high "well into 2010."

Another negative sign is the nation's savings rate, which rose to 6.9 percent in May, the highest in 15 years. While the habit of saving rather than spending everything is commendable, the latest numbers suggest the consumer economy, which accounts for 70 percent of economic activity in the United States, could be hard hit.

The Commerce Department's June retail sales figures showed growth of 0.6 percent, but the growth was in large measure in automobiles, restaurants and gasoline. Once those numbers are stripped out, retail sales slid by 3.8 percent, according to the National Retail Federation. "Although several economic indicators are starting to show signs of improvement, it is going to take a few more months - maybe longer - for people to feel comfortable spending again," said Rosalind Wells, the NRF's chief economist.

Clearly, there are a few positive signs as the economy slowly nurses itself back to health. But it's way too early to call the recession over.