The economy is still growing, but just barely. The latest wave of downbeat economic data, including Friday’s report on gross domestic product, has renewed fears that we could be headed for the second half of a “double dip” recession.
It is even possible that the apparent economic recovery is a mirage, and that the recession that began in December 2007 never really ended.
Increasingly it seems that the unprecedented measures taken in 2008 and 2009 to revive the economy are not working because the recession is unlike any this country has seen in the past 60 years.
“After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead," Gluskin Sheff chief economist David Rosenberg wrote in a recent note to clients. The economy's sluggish performance shows that "this is not actually a traditional recession at all," he said.
In a widely anticipated speech Friday, Federal Reserve Chairman Ben Bernanke tried to allay fears that the central bank is out of "bullets" and unable to do anything more to revive the economy.
He said that he expects growth to pick up next year and that the central bank is considering buying more securities if needed to ensure that interest rates stay low for an extended period. And he said the Fed could encourage more lending by cutting interest payments to banks on the cash they keep in reserves.
"The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do," he said at an annual gathering of economists and central bankers from around the world in Jackson Hole, Wyo.
Rather, he said, the Fed is weighing whether the costs and benefits of those measures justify using them.
But Bernanke acknowledged the Fed can't do all the heavy lifting.
"Central bankers alone cannot solve the world's economic problems," he said.
After the housing bust of 2007 and financial meltdown of 2008 sent the economy into reverse, the government responded with time-tested policy responses, albeit supercharged. Those included $1 trillion in stimulus spending and tax cuts, the Federal Reserve's $1.25 trillion cash infusion into the shaky mortgage market and a $700 billion bailout for the battered banking system.
The jolt of cash flowing through the system produced a surge of growth late last year that carried into 2010. That growth spurt prompted many economists, investors and policymakers to conclude that a recovery was under way.
But a recent string of gloomy economic data has prompted second thoughts about the nature of this recovery. The latest scary sign: the government estimated Friday that the economy grew at an anemic 1.6 percent rate in the second quarter, not the 2.4 percent rate originally reported. Consumer sentiment also is falling, a private survey reported.
For now, many forecasters still believe the recovery is intact and expect modest growth to continue into next year. Bank of America chief economist Mickey Levy is among those who thinks the current “soft patch” is only temporary.
“I think the soft patch is similar to every other soft patch in every prior expansion,” he said. “I think the probability of (a new) recession remains pretty low."
The official arbiter of U.S. economic cycles, the National Bureau of Economic Research, has yet to declare an end date to the recession that began in December 2007. According to one commonly cited rule of thumb, two consecutive quarters of growth mark the end of a downturn.
But the panel relies on a broad range of data, including employment, when setting the official beginning and end of an economic cycle. Members of the dating committee have said privately that they hope to avoid calling the end of a recession before a convincing recovery is in place. (Some economists suggest that the “twin” recessions of 1980-82 were actually one long recession.)
There are other reasons to suggest that this recovery may not be like any since World War II because the causes of this recession were different — both in the nature and scope of the contraction. Other postwar recessions typically were characterized by drops in demand. In time, lower consumption created pent-up demand which brought higher levels of output, increased hiring and an upward cycle of growth.
The current recovery has been marked by an unusually weak pickup in demand. And the latest GDP data show that pickup is fading.
Some analysts argue that this recession is not responding to massive government stimulus because the underlying economy has sustained much greater damage than in past downturns, especially because of the housing bust.
The liquidity trap
Since peaking in the third quarter of 2007, the value of household assets — including homes, as retirement funds, savings accounts, etc. — has shrunk by $11.4 trillion, according to the Federal Reserve. Commercial banks have written off roughly $350 billion, according to the FDIC. Federal government deficits have swollen to historic levels; state governments are scrambling to come up with over $100 billion to cover budget shortfalls.
Consumer spending, which has typically led recessions to recovery, has been further dampened by the persistently high unemployment rate.
“Labor market conditions are arguably even weaker than the recent slowing in private sector payroll growth suggests,” said Paul Dales, an economist at Capital Economics. “That’s because federal, state and local governments are all cutting back.”
Additional aid to states might help blunt the impact of those cuts, but that seems unlikely in the near term as Congress faces angry voters in an off-year election. With interest rates already near zero, Fed policymakers are considering additional measures to push more money into the economy to spur lending. But with $1 trillion in bank reserves sitting in the Fed’s vaults, lenders aren’t short on cash.
That could leave the central bank in a “liquidity trap,” said Mohamed El-Erian, CEO of PIMCO, the world's largest bond investor.
“A liquidity trap it's basically when you try to push people to take more risks; you try to push banks to lend more; you try to push companies to to invest more and and they tell you no thank you,” he said. “So you're pushing on a string. Monetary policy can no longer force people to do things."
Fed officials meeting Friday in Jackson Hole, Wyo., will be discussing a variety of possible solutions, but they are unlikely to make any decisions.
“Our goal here has been to bring policy issues forward that are broader in context than the immediate events, and the chairman has generally spoken at that level,” Kansas City Fed President Thomas Hoenig told CNBC. “It’s not a place for policy decisions or discussion. That’s done in a different context in Washington or in the regions."