Stock markets have rebounded sharply, consumer confidence is rising again, and construction spending unexpectedly increased in March. Federal Reserve Chairman Ben Bernanke called recent improvements in the economy “green shoots” of a recovery. Economist Nouriel Roubini, who correctly forecast the downturn, likens them to “yellow weeds.” The Denver Post assembled a panel of local economists to discuss whether a recovery is at hand and how the end of the longest postwar recession might play out.
MICHAEL ORLANDO, a principal at Economic Advisors:
I don’t think the economy has hit bottom yet, but we are probably close. After contracting at an annual pace of 6 percent over the past two quarters, we are sure to see one more quarter of falling GDP, and if we’re lucky, we could be flat by the third quarter. In addition, the stimulus bill should be adding about $75 billion a quarter to aggregate demand, which should round to about a 2 percent bump in annualized GDP through the last three quarters of the year.
NATALIE MULLIS, chief economist with the Colorado Legislative Council:
I don’t think we’ve hit bottom yet, although the free fall appears to be behind us. I still expect to see job losses continue through at least this summer and at slower rates through the rest of 2009. The average person in Colorado won’t really feel a recovery until sometime in 2010.
BILL KENDALL, president of the Center for Business & Economic Forecasting:
We have reached the point where the repeat of something like the 1930s Depression is probably receding fairly rapidly. Unemployment-insurance initial claims have been dropping for the last several weeks, and that typically comes before the labor market begins to improve. So I would expect some improvement in the second half of the year, probably positive growth but not very much positive.
MOHAMMED AKACEM, economics professor at Metropolitan State College:
There is so much overhang in the housing sector still. It is going to take some time for that to work itself out. When that overhang is cleaned out, then I think we can talk about a slow, measured recovery. 2010 seems to be a reasonable sort of year for a recovery, but not before.
Post: What indicators do you think are the most important to watch in looking for a turnaround?
Akacem: If you are asking what the average person, not the trained, professional economist is looking for, I think it is a sense that employment is recovering. That will be the first sign for them. Are people finding jobs and how comfortable am I about keeping my job. But that sense of being comfortable is something that is very difficult to measure.
Kendall: I’m watching initial unemployment claims, which have improved the last few weeks, and a couple other indicators that have not. When things begin to get better, firms, before they go out and hire new people, will either bring in temps, or extend the hours of their current workers. And both of those have not shown any signs of really turning around yet.
Mullis: I don’t think any of us really knows how long credit markets will take to return to normal and what that normal will look like. For consumers, I am looking at initial unemployment-insurance claims, consumer confidence and global exports. I would be very interested to see spending on durable goods move up. For businesses, I need to see that they are able to operate without the same access to the capital that they had before.
Post: Some economists expect unemployment will get above 10 percent, even if the economy starts growing again. Any risk that we are seeing a severe case of wishful thinking in talking about recovery?
Kendall: We are looking at a long, hard slog here. Two characteristics that will make this one particularly long and hard are one, that it was precipitated by a major financial crash, and two, that it is synchronized, in other words it is occurring in most of the world. Tight credit and the high burden of debt that households have is going to limit recovery for awhile. Households still need to repair their balance sheets. The savings rate is now up to about 4 percent. Some say that is about as high as it is going to get, but others say consumers may continue to accumulate more savings until it gets up to about 7 or 8 percent or maybe even 10 percent, which it was in the 1970s.
Mullis: Even as the recovery starts, the unemployment rate can continue to go up. What happens is people who dropped out of the labor force because they thought they had no chance whatsoever of getting a job are going to start looking again. So even though the unemployment rate keeps going up, that doesn’t mean that the recovery is not happening. And as far as wishful thinking, I think wishful thinking is good for the economy, because expectations matter. They are a necessary ingredient to recovery.
Orlando: We have to be realistic about what we mean by recovery. Typically, we will see the stock market bottom out and turn around. It is not clear to me at this point that there is a whole lot of free-fall left in the stock market. Unless something new and dramatic happens in credit markets, then GDP will recover well before the labor markets do. So we are probably going to see continued job declines well past the point where we are into the recovery. That is why “recovery” is possibly not such a great term. You almost need something much more technical and neutral sounding.
Akacem: I would not personally be surprised if you saw unemployment at 11 or 12 percent. One thing I worry about is credit-card debt. That is looming because when people don’t have jobs, they will be rolling over their debt from one card to the next. And that is one overhang that may have to work itself out as well.
Post: Mohammed, housing and finance led us into the crisis. Should they recover first or will other sectors like technology or energy show the way out?
Akacem: The credit market will be No. 1. If the banking system doesn’t ease up, I just don’t see how the recovery can go on the way we are discussing here. One thing that could complicate it, because we are going into the summer driving season, is the energy market. Oil prices went up to about $60 a barrel. If they go north of $70, then that could complicate the outlook.
Post: Mike, the Federal Reserve and U.S. Treasury have taken unprecedented steps to shore up the financial sector and boost the overall economy. How would you rate the job they have done in easing this crisis?
Orlando: I think the history books are going to treat the policymakers pretty kindly, although that does not seem clear now and even though they got off to a very rocky start. Early on, the best you can say is they get an A for effort, a D for communication and an incomplete for their results. They are communicating much more clearly and that is why we are starting to see results. At this point, I would give them a high B, given the historical nature of the financial crisis and the real economic adjustments that were frankly unavoidable. That’s not bad.
Post: Bill, how will Colorado fare in any national recovery? Are we along for the ride or any chance we can pull ourselves out sooner?
Kendall: Six months ago I was telling people I thought that whatever happened to the national economy, the world economy, that we in Colorado would do a little bit better. That’s because historically we had done better and because our housing markets didn’t experience the boom and because we didn’t have a large financial sector, where the trouble was concentrated.
In August, the Colorado economy really went off the cliff. We lost almost 75,000 jobs in the last seven months. By many measures we are moving along at about the rate or maybe even a bit worse than the national economy. My current thought is that in August and September the financial markets seized up. Colorado’s economy is concentrated in small firms much more vulnerable to tight credit than the larger firms. As a result, we are doing as badly as the nation.
What had been one of the few strong sectors of the economy, the oil and gas exploration over in northwest Colorado, has pretty much ground to a halt because gas prices have gone to nothing and because all sorts of gas deposits were suddenly discovered all over the country.
I would expect our recovery to track the nation at best. I don’t see any prospect for our getting out of it sooner or more strongly than the nation.
Post: Natalie, how will local governments cope with a prolonged period of reduced consumer spending and increased savings, given how important retail sales are to tax revenues?
Mullis: Well, they are going to have to cope with less at every level of government in Colorado. There are really only three choices that government has. The first one is make ongoing program cuts, the second one is to use one-time sources of money, like a savings account or reserve fund, and the third is to actually create a new source of revenue through fees. Anytime you use a one-time source of money like a savings account, that just means you don’t have that money available next year, so it really just moves that budget shortfall forward. We are going to see several years of difficult budgetary decisions for governments in Colorado.
Post: Some think a recovery means things going back to the way things were: easy credit, cheap imports, rising home values and plentiful jobs. Can and should we wish for that, or will we find ourselves in a much different place when this is all over?
Orlando: We will be in a much different place. Households are going to need to rebuild savings for years to come, employment will grow at a restrained pace and probably won’t hit peaks of the last expansion for at least two years, maybe more. Financial and business managers are going to be much more cautious with taking risks and experimenting with financial innovations, at least until the next generation is in charge.
Mullis: I describe what we have been going through in the world economy over the last decade as the global economy birthing pains.
We started even during the last recession with a lot of money coming into America from the growth in India, China and other parts of the world. That money wants to go where it is safe, in America and other developed countries. That inflow was important for a lot of the financial product innovations that happened, a lot of the exotic mortgages that created the credit bubble, that created the housing and consumer asset bubbles that have burst and created this recession.
What we are going to see coming out of this is a more global economy than we did before. America, while still important, is going to be less of a focal point.
Kendall: There were a couple of underlying factors that gave rise to the fairly severe downturn we had. Natalie mentioned one of them, which is the global savings glut, but the other was after 25 or so years of nothing too bad happening, everyone — investors, regulators, politicians, homeowners, prospective homeowners — became insensitive to risk. They were willing to take the plunge without considering what the downside of taking that plunge was. These players will be more cautious in the next few years.
Akacem: We won’t go back to the easy, quick credit because banks and people have learned their lessons — they got burnt. I don’t think anybody will buy more house than they can afford. If there is a blessing in disguise here, hopefully we will start respecting the idea of saving.
