Federal Reserve Chairman Ben Bernanke told Congress on Tuesday morning that the
economy is likely to pull out of the recession and start growing later this
year. This in itself isn’t news — Bernanke has been saying the same thing for
months. What’s news is that people are starting to believe him.
Talk of “green shoots” is everywhere. The stock market is up 34% since early
March. Credit market conditions are easing too, if less dramatically.
Housing sales are picking up in some of the hardest hit markets, though
prices are still dropping. Measures of business activity and consumer
sentiment are returning to levels last seen before the great global
financial panic of last fall.
But let’s not get ahead of ourselves. So far, all we’ve seen is a slowing of the
breakneck economic decline that began in October. There are differing spins
you can put on this truth. “People like to talk about green shoots,” New
York University economist Nouriel Roubini said during a recent visit to
TIME. “All I see is a lot of yellow weeds.” On the other hand, a slowing in
the pace of decline during a recession has in the past almost invariably
segued into the end of that decline, recession maven Lakshman Achuthan of
the Economic Cycle Research Institute said in an e-mail.
But even if the outright decline in economic activity — a.k.a. the
recession — ends later this year, we won’t exactly be out of the woods. “We
are so focused on whether recovery will be at the end of this year or the
beginning of the next that we lose sight of the more important question,”
said Mohamed El-Erian, CEO of bond-investing giant Pimco, at a conference in
Los Angeles last week. “It’s not whether the recession will be over; it’s
what does the new normal look like”
There’s pretty widespread agreement that the recovery, when it comes, won’t
be robust. “Even after a recovery gets underway, the rate of growth of real
economic activity is likely to remain below its longer-run potential for a
while,” said Bernanke in his testimony to the Joint Economic Committee
on Tuesday. That means unemployment will keep rising even after the economy has
stopped shrinking. And if unemployment keeps rising, consumer spending won’t
rebound strongly, bank-loan losses will keep rising and a recessionary
relapse isn’t out of the question. The next monthly employment report, due
Friday, is expected to show continued heavy job losses. So no signs of a
reprieve from that quarter.
Then there’s all that bad debt. We’ve now mostly worked through the subprime
mortgage mess that started this whole debacle, but lots more losses — from
prime mortgages, credit cards, commercial real estate, you name it — are still
to come. Morgan Stanley economist Richard Berner estimated on Tuesday that even
in the most bullish case, banks and other lenders have only recognized about
half the $1.7 trillion in loan losses they’re likely to suffer over the
course of the downturn. In Berner’s “bear” case, losses will top $4
trillion.
It is this bad-debt overhang, however big it turns out to be, that is likely
to cast a pall over the recovery for years to come. An economy, even the
world’s biggest, simply can’t work its way out of a mess like that in a few
months’ time. So enjoy those green shoots as they sprout. They’re good news,
but they’re not enough to live off of.
See how Americans are spending now.
See pictures of retailers that have gone out of business.
