Recession Economy? On Its Way Out

There’s reason to be optimistic about the U.S. economy. Pro or con?

Pro: It’s Just Cyclical

Despite the gloom and doom from those ignorant of financial history, the current crisis is similar to the many financial crises that we have experienced in the past. We had an asset bubble followed by a bust. Our leaders were too slow to understand the gravity of the situation. Financial institutions that lent too much money to the wrong people got burned, and their failure threatened to cause a chain reaction.

However, the Great Recession will not turn into Great Depression 2.0. Our leaders have taken most of the right steps to prevent a collapse of the financial system and restore economic growth. They have been careful to avoid the biggest mistakes of the Great Depression, such as letting the banking system fail and the money supply collapse. History shows that these panics burn themselves out. After the excess inventory is worked off, businesses find themselves too lean and start hiring again. Economic growth resumes. Financial markets are already signaling that the panic phase is over.

Yes, we have many long-term challenges: We must deal with the aging of our population, dependence on foreign energy, global climate change, and the instability of global politics. But we also have many long-term advantages. We have a well-educated, hard-working, and innovative population capable of rising to these challenges. Our legal and political institutions, although not perfect, are basically sound and provide a climate conducive to economic growth.

Con: This Downturn Is Different

Have we dodged another Great Depression? For sure. Are we out of the woods? Not by a long shot.

The best we can say at this point is that the economy is getting worse more slowly than it was before. Real gross domestic product fell at a 6.3% annual rate in the last quarter of 2008; it was falling at a 5.5% rate in the first quarter of this year, and, if forecasts prove correct, it will decline only 1% to 2% in the second quarter. So the economy may start to grow again soon, but the expansion will likely be anemic, with a real risk of a “double dip” recession—that is, recession followed by a modest short-term improvement that quickly lapses into recession again.

What is missing is any plausible source of economic demand. After 2001, the housing bubble fueled consumer spending, construction, and growth. This time around, consumers, anxious to rebuild their balance sheets, are poorly placed to take the lead.

The federal stimulus package fell far short of plugging the projected output gap, and fresh cuts at the state and local level will neutralize much of the package. With the rest of the world following us into a deep recession, the prospects for export-led growth also appear dim.

The biggest problem, though, remains the labor market, where unemployment will quickly top 10%. Even if the official recession ends this year, the last two recessions and their "jobless recoveries" suggest it will be two to three more years before the labor market begins to tighten again.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

JP

No, it's not. just wait until the increasing number of umemployed start maxing out and defaulting on the credit cards they've been living off. a jobless recovery is no recovery--will get worse before it gets better.

Ruth Mott

There's lots of evidence to prove almost anyone's pov. Mine? I think it's on its way out because, after a dry spell for 2 quarters, I have several new clients. This tells me people are beginning to see hope and possibilities.

Joseph

Ok, let's say we are coming out of the recession. Tbe problem with this idea is the fact that the United States is swimming in a sea of debt. Also, the financial system is tightening its grip on political power in Washington, which means that even if we do come out of the recession soon, there will almost surely be a much more devastating one a decade or so down the road, because the banking cartel has spread its squid tentacles even further. Third, the money supply has been expanded greatly, which means that once we come out of the recession, we are likely to have stagflation the likes of which we have never seen. So with all these factors wrapped into one, it's looking increasingly irrelevant if we get out of the recession now. This next decade is looking more and more like the United States will have a Lost Decade. But even worse than Japan's Lost Decade.

Suzanne

The debt is far too large for us to come out of this in any permanent way anytime soon. If the central government's size continues to grow and the spending continues to escalate, as promised by any national health care system, the debt becomes more ponderous. We haven't even experienced the tax burden yet.

Gimme a BREAK

Both sides are saying essentially the same thing, in my view. Congress took boatloads (not to be confused with the new clown at Yahoo of Wall Street money to neuter the Justice Dept. andSEC and actually write financial legislation (right Barney? Nancy?). Now, those of us who pay taxes, saw it turned over to Citi/AIG and Detroit (Cash for Clunkers I, II, and III, awaiting more).

The market is still 'In Hope' with the trillions being given away to the corrupt, greedy and incompetent, so while many of you still face being fired/laid off, Congress is making Wall Street and Detroit rich again. The vultures are still circulating, awaiting rich pickings off your misery; I propose feeding these vultures, most of Congress up for re-election, in 2010 and 2012. That, would be fun, no?

williambanzai7

Hey bartender, gimme another round of that Chinese bailout sauce.

Shorts-R-Us

The Greatest Fraud Never Told: Part TWO. Here we go again, these are the same soothsayers who were saying that these subprime loans and these voodoo derivatives were all contained. Now Greensapn, the creator of the two biggest bubbles, is coming out saying all is well, the recession is coming to an end. The jig is up my fellow Americans--we don't produce, make, manufacture, or supply anything anymore. The only thing we supply to the global economy is debt.
Economics 101 is out the window and the new Economics 101 is the Joe Biden Rule of Economcis. Where is Adam Smith when you need him?

K

Even if we forget about the unemployment rate and look at other trends, they are not improving much. Yes employment is a lagging indicator. However there is a troubling sign such as full time workers becoming part-time with the average work week at 33 hours.

If this continues both segments of the population are going to continue to feel the pain. Once this stimulus wears out we may see a double dip recession.

The one good thing that came out of this is that banks got to raise capital. Hopefully, this reduces the chance of the banks fleecing the government again.

JohnMD

This time is different. We are out of the woods on the subject of a 2nd depression. We won't have that. Instead, we are going to have something much worse, called hyperinflation, orchestrated by the banks to save themselves from financial ruin. The middle class is about to get wiped out. Thank you, Ben Bernanke, Henry Paulson, and Timothy Geithner.

Martin

Regardless of whether or not we are coming out of it, it is time for business owners to focus on fundamentals. Particularly those related to marketing, sales, and customer treatment and retention. Remember that it costs much more to attract a new customer than to retain an existing one. Revisit any online sources for information on how to improve these areas of your business.

Numbers

It's unfair to call this a "debate." John Schmitt uses actual evidence to argue that without additional government stimulus, the economic outlook looks especially poor. James Angel reminds the 10% of the labor force without a job that they shouldn't worry because they are "hard working and "innovative" and our "legal and political institutions...are basically sound."

Mark

Funny that no person is willing to say that they took a risk on a questionable loan and lost the bet. Now, everyone wants to lay blame. Same goes for businesses and governments that only planned for infinite growth with no contingency. Americans are some of the most creative individuals on the planet as a result of our tolerance for open discussion and thought. Transitions are always painful but full of opportunity. So, let's get busy--90% employed is still a lot of people working toward a more sustainable economic model. Infinite growth was never believable from a scientific perspective.

Jose Roncal

End of Recession or not, there are still plenty of distressed businesses that are teetering on the brink of collapse. With my years of experience as a transformational and corporate turnaround specialist, I've noticed that those possessing similar skills are suddenly in high demand and positioned to ride out this perfect storm. In fact, I can't recall a time when these services and expertise were in greater demand.

Even as the economy tries to recover, we are still facing tight credit markets and bankruptcies continue to rise. Private equity is turning its back on traditional leveraged deals and looking toward investing in distressed companies.

I believe that many of the private equity deals that occurred in 2006 and 2007--those with weak covenants and too much debt--will go belly up in the next few years. How will it all play out? Cash usually isn't available to leverage these kinds of distressed situations and with the lack of bankruptcy credit, I predict that many of these restructurings will take place outside of bankruptcy court and end in rapid liquidation.

I believe that the future of private equity finance will be more focused on the long term--with an investment horizon of five to eight years rather than the previous three to five years. Banks are having to exercise more patience now because even if we see an economic recovery in two or three years, the after effects of the downturn may take five to seven years to work it's way back to complete equilibrium given the weak financial markets.

There isn't a lot of good news in this recession, but it does tend to eliminate the weakest of the private equity firms and leave greater opportunity for those that survive. There will be fewer players in the long run, and more opportunity for highly qualified people that specialize in turnarounds.

Michael A. Shea

Mr. Roncal writes: "I believe that the future of private equity finance will be more focused on the long term--with an investment horizon of five to eight years rather than the previous three to five years."

I'm not sure how he can describe the previous investment horizon as being as long as 3-5 years. But whatever the facts are, he is wrong to argue that because investors got burned, they will learn their lesson and start investing for the long haul. In the absence of actual changes to the incentives and regulations, investors will not adjust their investment horizons.

If anything, the absence of needed institutional reforms will shorten investor time horizons. Market players now know to expect a collapse at some point, so the incentive will be to stay ahead of the tipping point.

Pan P.

How about the U.S's debt? It may soon not be able to pay off the interest alone.

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