The NYT's David Leonhardt says the U.S. economy is stalling. Not so, others contend, citing market signals suggesting that the country is unlikely to tip back into recession.
Both sides may be correct. Sluggish GDP growth is obviously discouraging, especially with Washington in a state of political paralysis and unwilling to administer the necessary fiscal medicine. Yet economies in recovery following deep economic downturns commonly spin their wheels for a quarter or two before getting back on track.
And while it historically takes less than a year after a recession for the economy to return to normal, it typically takes longer when the crash 1) is global; 2) was caused by a financial crisis (as opposed to different shocks, such as a spike in the price of oil -- see chart at bottom).
Which is another way of saying that the latest economic data shouldn't be cause for panic. Rather, it more likely confirms what we already knew -- that the road back to a healthy economic will continue to be long and rocky. After the 1990-91 recession, which lasted eight months, it took nearly two years for jobs to return to their pre-bust peaks. After the dot-com crash in 2001, it took 39 months.
The current recession was of course far more severe. Accepting the official consensus that it ended in June 2009, fitful growth over the next year or two is likely to be the rule, not the exception.
Grinding to a halt?
None of which means there's no cause for concern. The Bureau of Economic Analysis this week pegged first-quarter growth at 1.8 percent, flat compared with the previous period and lower than investor expectations of 2.2 percent. The "real" growth rate could be even less than that because the BEA, part of the Commerce Department, uses a lower inflation rate in making its calculations than other economic forecasters.
Five important -- and interrelated -- signs show that the economy is cooling:
- Elevated jobless claims. The number of Americans filing for unemployment benefits rose last week and remains at unusually high levels. With the unemployment rate stuck at 9 percent and even likely to tick up later this year, the job market remains shaky.
- Slow consumer spending. The stubbornly high jobless rate and inflation concerns are undermining consumer spending, which grew only 2.2 percent in the first quarter. That was lower than the 2.7 percent the government had expected. Retail sales are flat. Surveys also show that small businesses are especially pessimistic about the the economy.
- High food and energy prices. Although core inflation remains historically low, grocery prices, including for meat, fruit and vegetables, are rising unusually fast. And while gas prices have fallen this month, oil prices remain 40 percent higher than a year ago.
- Housing woes. Existing home sales are plunging, while the number of properties on the market is increasing. That is continuing the slide in home prices, further eroding homeowners' purchasing power.
- Slow industrial production. With consumer demand ebbing and retailers holding off on replenishing inventories, manufacturers are reluctant to boost production. That, too, is keeping a lid on hiring.
What the market thinks
The news isn't all bad. Economists attribute at least part of the recent dip in growth to temporary supply disruptions related to the Japan earthquake in March. If so, growth should rebound later this year as the Japanese get back on their feet. Gas prices also are easing. And pundits such as Bloomberg's Caroline Baum cite the wide interest-rate spreads as evidence that the financial markets still expect the U.S. economy to recover, if slower than everyone would like. She writes:
A $15 trillion economy doesn't turn on a dime. Listening to the commentary, you'd think that one day inflation is ready to take off and the next the economy is struggling to stay afloat.
In the real world, things don't change that quickly. The past seven expansions lasted 71 months, on average. The current one is not quite two years old. And by some metrics, it has yet to get going.Of course, if it's true that the economic recovery has "yet to get going" nearly two years after the Great Recession officially ended, that, too, may be cause for concern. The latest data doesn't prove that we're headed for another fall. But it doesn't exactly point the way to salvation, either.