The Beginning of the Recession’s End and Why the Unemployment Rate is Key

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Recent economic figures released confirmed what most had expected: America’s economy is still contracting. The world’s largest economy shrank at an annual rate of 1% in the latest quarter (compared to 6.4% in the previous one) meaning that while the country’s deepest post-war recession was not over, the rate of decline is most definitely slowing. In fact some optimists would even say that the nation’s economy is showing signs of stability – albeit without the two sure signs of economic growth – inflation and employment.    

There are also other reasons to cheer, like newly released housing data. The S&P/Case-Shiller index of house prices in America’s 20 largest cities rose for the first time since July 2006 in May, by 0.5%. Americans also bought more houses in June than they did in May: sales of new single-family homes rose by 11%. All of this suggests things are getting brighter in the troubled housing market – the key bastion of the American economy.   

A sense of an end to the decline is also apparent from the Federal Reserve’s most recent “Beige Book,” a twice-quarterly publication in which the Fed sums up its assessment of the economy based on reports from its 12 constituent regional reserve banks. The latest beige book indicates that economic activity has begun to stabilize, albeit at a low level.   

The stock market has also reflected improving economic fortunes, reaching 12 months highs after a strong corporate earnings season. Government spending rose at a 5.6 percent pace last quarter, the most since 2003, as President Barack Obama’s $787 billion stimulus program began to take effect. The funds are aimed at helping states retain workers, financing infrastructure projects and reducing tax payments – all boosting the economy.   

All this may explain Barack Obama’s comment on Wednesday that America “may be seeing the beginning of the end of the recession”. He however added it will take many more months to fully dig ourselves out of a recession – a recession that we’ve now learned was even deeper than anyone thought.  

Reaching a bottom does not mean a quick rebound in economic activity, however. The recovery is expected to be shallow and prolonged because American consumers, worried about unemployment and the collapse in the value of their homes, are seeking to reduce their debts, and thus will not spend as freely as once they did. This is reflected in the numbers as well, with a positive national savings rate after years of negative savings.

House prices still have a long way to go before they return to the level of a year ago (let alone to their peak). The Case-Shiller index may have risen in May but it remained 17.1% lower than a year earlier, when prices had already been falling for almost a year. Another concern is that the flexibility and mobility of America’s workforce, long a strength of the economy, is limited as long as Americans find themselves unable to move home because of negative equity (when the value of a house is less than the mortgage on it). The situation is likely to persist until prices recover more. 

The greatest worry is the bleeding in America’s labor market. Unemployment typically continues to rise even after GDP starts to increase, so pain for workers is far from over. Already 9.5% of the workforce is unemployed, and 144 of America’s 372 metropolitan areas reported unemployment rates of at least 10% in June. More jobless will probably mean less shopping and a slower recovery. However, treasury secretary, Timothy F. Geithner pointed out that growth in production should mean that the pace of job losses should slow further. He also said that the administration is considering asking Congress for an extension of unemployment benefits as 1.5 million jobless Americans exhaust their benefits in coming months.  

The latest consumer-confidence numbers show that Americans are jittery: an index from the Conference Board, a research group, fell to 46.6 in July from 49.3 in June. The quarterly GDP report also makes it clear that consumer spending, which rose slightly in the first quarter, dropped again in the second, by 1.2%. The good news, therefore, was more a result of government stimulus than evidence of a real, sustainable recovery in private demand. 

The beginning of the end may be in sight, but a full recovery is some way off. Hopefully America and its people can learn from the painful, but valuable lessons learned of over consumption, greed and wreckless corporate cultures of risk.   

Picture courtesy Cobalt   

Related:   

~ $1 Trillion Revised Bank Bailout & Housing Rescue Plan
~ No Second or New Economic Stimulus Package in 2009. But More than Likely in 2010 or 2011.
~ China Flexes Economic Stimulus Muscle
~ US dollar outlook and predictions for 2009, 2010 and beyond
~ How Long will the Current Recession Last? Not as Long as You Think.
  

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