Are We Leaving the Recession Behind

The latest from Robert Barr in the Floral Trend Tracker. He makes a good point about the money that federal, state and local governments are borrowing for their programs.

With a number of economic indicators flashing green over the past couple of months, it sure seems like we're leaving the recession behind. Even new home sales are rebounding, up 15% in the last three months (May, through July) relative to the three months prior (February through April), even after seasonal adjustment.

But even if we're in a "statistical" recovery, the economic climate will feel sluggish. Expect to hear a lot about our "jobless" recovery well into 2010, as though that's a contradiction in terms. It isn't; the last two recoveries were marked with very low job growth for quite some time. In fact, the jobless recovery of 1992 felt so oppressive that the presidential campaign treated it like a recession: "It's the economy, stupid!" And 20 months after the recovery began (as was determined later), the poor economy was a key contributor to President George H.W. Bush's defeat in November 1992.

So it ís not surprising that, even as we get some positive reports, we see that employment is still falling, with the number of payroll jobs 4.2% lower than it was a year ago.

Why such a lackluster recovery? The economy is still making major adjustments to the severe imbalances that created the worst financial crisis since the Great Depression.

Bank lending activity remains low, especially for small business expansion. The willingness of banks to lend to consumers continued its two-year descent during the summer. True, analysts were quick to point out that the declines were less severe than those of a year ago. But still, after the plummet of the past year, we're still falling to even lower levels today. Bank lending standards across all major loan categories to households and businesses also continued to tighten.

For their part, households are improving their balance sheets ñ saving more and consuming less. Many suggest that this lack of spending is harmful to the economy — as if to be economically beneficial, income should be spent immediately and not saved. But that's a misconception. It's easier to see the beneficial effects of immediate spending (Look! They bought cars, homes, and furniture!) but the beneficial effects of saving, while less visible, are nonetheless critical to long-term economic growth and prosperity. More household savings expands the pool of available capital for firms to borrow to expand their business.

That means funding the same level of economic activity will require less borrowing from overseas and lower interest rates in the economy.

Then the issue becomes: if rates are low and funds for lending are available, are businesses willing to borrow and expand production? How confident are they that the economy will be ready to buy their expanded set of products? As always, business confidence and entrepreneurial assurance will need to be in place to generate a sustainable recovery.

Looking long-term, the massive increase in government debt will offset the progress households are making in correcting their debt imbalances. The deficit-to-GDP ratio in 2008 was 3.2%; in 2009 it's expected to be 11.2%, and the administration ís ten-year forecast projects that the U.S. will exceed $9 trillion in total deficits just over the next ten years. That's in addition to the $5.8 trillion national debt we've already accumulated.

Why is that important for future economic growth? Because the money that federal, state and local governments borrow for their programs can't be lent to businesses to fund private-sector projects. Consequently, the more we allow the government to borrow, the less we have to channel toward productive investment.