It's Not Still a Recession (It Just Feels that Way)

Practical Economics

It's Not Still a Recession
(It Just Feels that Way)

Patience is hard but necessary. The economy is growing, albeit slowly.

Is the economy still in recession? Most Americans think so. With millions of would-be workers jobless, foreclosures rising and home prices in the toilet, to many folks, it must feel as if the economy is still shrinking.

Strictly speaking, though, it’s not true. The economy is growing, albeit slowly. The problem: It’s a long climb back up from the trough that the economy fell into.

The trend is in the right direction, but employment, output, real estate prices, housing construction and sales fell so sharply that it will be months -- maybe a year -- before much daylight can be seen. Worse, the ground has gotten spongier in recent weeks. Private sector job gains slowed, retail sales dipped and the housing pickup wilted.

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Recent softness won’t persist, however. It’s largely the result of several temporary circumstances.


First, the home buyers’ tax credit exaggerated sales. And now the disappearance of the credit is overstating the housing market’s weakness. As that impact fades, an underlying trend of modest sales improvement will reemerge. How modest? A decent bet would be about 10% over the previous year’s levels. That’s about how much higher home sales were in the first three months of 2010 -- before buyers geared up for round 2 of the tax credits -- than they were in Jan.-March of 2009, before the initial round of federal tax credits for home buyers really kicked in.

Second, federal benefits for about 3 million long-term unemployed expired in the spring. Soon Congress will reinstate those benefits, putting money back in the hands of folks who have so little that they spend pretty much every penny they get. What’s more, the benefits will be extended retroactively -- making up for the checks people didn’t receive in the last few weeks. When that $4 billion in benefits hits, late this month or early next, it will help spur a rebound in retail sales.

And finally, fears about a worst-case European-led global meltdown have eased. Though risks remain, actions to rein in deficits, combined with stiff financial backing from the IMF and the European Union, have investors less worried about the scenario.

As the economy hits firmer ground, modest gains will become more apparent. And current calls for more fiscal stimulus will start to die out. The fact is, there’s a hefty dose of economic grease still in the pipeline. As of June 30, nearly half of the 2009 stimulus package of tax cuts and spending hikes hadn’t been realized. Neither will demands for serious, immediate deficit reductions take hold. Too many policymakers -- including some prominent deficit hawks -- are wary of cutting the support cord prematurely. They fear torpedoing a nascent recovery, as Japan did in 1997 when it tried to rein in its deficit by raising the consumption tax.

A steady course makes the most sense. While it’s premature to be pulling back on the reins of fiscal stimulus, it’s equally premature to embrace fiscal austerity at this time. And if events suggest otherwise, there’s ample time to adapt.