Economic recovery may improve during second half of year
What optimism about the recovery from the Great Recession that is out there is tempered and dependent on no new shocks.
Special to The Seattle Times
The first half of 2011 might charitably be called a growth recession. Gross domestic product slothed along at 1.8 percent in the first quarter and is expected to do little better in the second. The stock market tried and failed to gain pre-downturn highs. Job creation stalled.
The consensus calls for a somewhat better second half. Oil prices have moderated, Japan is recovering from the earthquake and its effect on the global supply chain. The Greek fuse on a eurozone detonation has been snuffed out, at least for now.
"Investors have interpreted the slowdown as longer lasting," said Chris Sheldon, director of investment strategy at BNY Mellon Wealth Management in Boston. "But we see growth getting back on track in the second half, in the range of 3 percent" increase in GDP.
Washington state Chief Economist Arun Raha seconds the motion. "We've been through what I'm calling a soft patch, but the reasons are temporary," he told me last week. "The second half will see stronger growth."
Except for weak construction, which Raha expects to "bump along the bottom" for the next year to year-and-a-half, the state is seeing several positives. These include booming Boeing production, hiring in software, a modest rebound in retail sales and perhaps stabilization in housing prices. Lower gasoline prices mean more disposable income.
Two years after the official end of the Great Recession, however, the path to recovery remains difficult.
Ethan Harris, head of North American Economics at BofA Merrill Lynch Global Research in New York, calls it "the rehab recovery," with three distinct elements.
• The good: Corporations are fully healed and America's trading partners have recovered.
• The bad: Banks are still on the mend and households are rebuilding their wealth.
• And the ugly: A continuing housing downturn and at least two more years of cuts to state and local government.
The forecast of Harris' shop is lower: 2.4 percent GDP growth for the year.
I quibble: The too-big-to-fail banks are doing better than ever, thanks to the Bush and Obama administrations' decision to save the existing, very dangerous financial system. Fearless prediction: That won't stop the big bankers from whining about even modest attempts at re-regulation.
But I keep coming back to the downright hideous: unemployment.
Fourteen million Americans are officially unemployed and millions more are underemployed. By the broadest (read, most accurate) measure of joblessness, the national unemployment rate is around 16.5 percent, and 18.4 percent in Washington. These souls are among the worst hurt by the slowdown.
Here, the more optimistic take comes from Raha, who argues that companies have exhausted worker productivity gains and will have to increase hiring as long as demand rises.
Sheldon said any improvement would be only gradual. "We'll have to see more retraining and job mobility. And technology is a wonderful thing, but it means there's less need for human capital. We're years away from full employment."
Here are my markers for the second half:
Nationally, the debt-ceiling game of chicken is risky. Moody's Analytics top economist Mark Zandi, hardly a bomb thrower, warned last week that if the ceiling isn't raised by August, a recession would result from the default. Similarly, draconian federal cutbacks would make recovery much more difficult.
The Obama stimulus, never big enough to fill the recession's output gap, is fading. The Federal Reserve's QE2 bond-buying program is ending and more easing is unlikely.
Interest rates will remain low and inflation isn't a threat. But the other Washington is unable and/or unwilling to provide leadership to help get the economy growing again.
The fashionable libertarian response is that this is a good thing. The real world will tell.
Closer to home, retaining momentum in recovering sectors, from aerospace to the ports, will be critical. Still, the consequences of budget cuts to universities and K-12 education, as well as the elimination of state tourism marketing funds, will take years to show.
What optimism is out there is tempered and dependent on no new shocks.
I'm skeptical about the oil prices meme, including that prices fell because of the coordinated release of 60 million barrels from strategic reserves to offset unrest in Libya. America alone consumes 20 million barrels a day.
So the retreat in oil prices has much more to do with the market's verdict: a continuing slowdown. A pickup will revive oil prices, which in turn will drag on growth.
If shocks happen other than default, I agree with Russell Investments' assessment that they would cause a flight to the safety of the dollar and Treasurys. So much for the richest nation in the world being broke and helpless. Politically paralyzed, yes. Broke and helpless, no.
Beyond that, America has yet to face up to the fact that the housing bubble cloaked serious structural problems in the economy that had been mounting for years. Modest growth in the second half of 2011 will not repair them.
You may reach Jon Talton at email@example.com
About Jon Talton
Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest