Friday, April 9, 2010

A Must Read

From the NY Times:

The American economy appears to be in a cyclical recovery that is gaining strength. Firms have begun to hire and consumer spending seems to be accelerating.


Usually you can depend on the White House to view the economy with the most rose-tinted glasses available. But it was not until last week, after a strong employment report, that President Obama started to sound a little optimistic.

“The tough measures that we took — measures that were necessary even though sometimes they were unpopular — have broken this slide and are helping us to climb out of this recession,” he said in a speech at a factory making battery components in North Carolina.

Note, however, that he seemed to believe the country remained in recession. It is virtually certain that is not accurate, as least as will be determined by the arbiters of recession at the National Bureau of Economic Research. “The recession is over,” one of those arbiters, Jeffrey Frankel of Harvard, wrote this week.

But the White House is unwilling to make that claim.

Why is good news being received with such doubt? Why is “new normal” the currently popular economic phrase, signifying that growth will be subpar for an extended period, and that the old normal is no longer something to be expected?

It is possible, of course, that I am wrong and the prevalent pessimism is correct. Many economic indicators, including Thursday’s retail sales report, are looking up, but that does not prove the recovery will be self-sustaining. There are issues relating to over-indebted consumers and local governments. The housing collapse will have an impact for some time.

But there are, I think, a number of reasons for the glum outlook that are unrelated to the actual economic data.

First, the last two recoveries, after the downturns of 1990-91 and 2001, were in fact very slow to pick up any momentum. It is easy to forget that those recessions were also remarkably shallow. If you are under 45, you probably don’t have much recollection of the last strong recovery, after the recession that ended in late 1982.

Add to that the fact that the vast majority of the seers did not see this recession coming. Remember Ben Bernanke assuring us the subprime problem was “contained”? In mid-2008, after the recession had been under way for six months, the Fed thought there would be no recession, and the most pessimistic member of its Open Market Committee thought the unemployment rate could climb to 6.1 percent by late 2009. It actually went over 10 percent.

In January of this year — after the recession had probably been over for at least a few months — the most optimistic member of the committee expected the unemployment rate to fall to 8.6 percent by late this year. The consensus was for a rate no lower than 9.5 percent.

Having been embarrassed by missing impending disaster, there is an understandable hesitation to appear foolishly optimistic again.

But even without that factor, it is normal for recessions to make people pessimistic. “Go back and read what people were saying in 1982 or 1975,” said Robert Barbera, the chief economist of ITG. “Nobody was saying, ‘Deep recession, big recovery.’ It is quite normal to expect an abnormally weak recovery. It is also normal for that expectation to be wrong.”

But if that is normal, one factor that brings optimism to some forecasts is absent this time. Both Republicans and Democrats have good reasons to be negative. Republicans are loath to give President Obama credit for anything, and no doubt grate when he points to his administration’s stimulus program as a cause of the good economic news, as he did in North Carolina.

The whole column is worth a read.