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Obama Optimistic, Yet Cautious on Economic Recovery Outlook

April 10, 2009 at 6:15 PM EDT
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The president said Friday he saw "glimmers of hope" in increased lending to small businesses, but the economy was still under "under severe stress." Analysts discuss the signs of economic recovery and the road ahead.
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MARGARET WARNER: After months of gloomy economic news and dark forecasts, President Obama pointed to progress today and what he called “glimmers of hope.” He spoke to reporters after meeting with his economic team in the White House.

BARACK OBAMA, President of the United States: We feel very good about the progress that we’re making in unlocking lending in some particular markets. We have also seen this month people starting to get their first checks, in terms of the tax cuts that were initiated through the recovery package.

And when you combine it with the other efforts that are being made across the country for infrastructure projects, for the kinds of innovative energy programs that were part of the recovery package, what you’re starting to see is glimmers of hope across the economy.

MARGARET WARNER: There was some positive economic news this week, including better-than-expected retail sales and record profits at one of the nation’s largest banks, Wells Fargo.

New jobless claims also fell slightly, fueling some hopes that the recession is bottoming out.

That helped lead to a fifth straight week of gains on Wall Street. The markets were closed today for Good Friday, but yesterday the Dow Jones Industrial Average surged more than 3 percent. All in all, stocks indexes are up 20 percent or more in the last five weeks.

But there’s still plenty of data pointing to a prolonged recession. The number of people receiving jobless benefits reached nearly 6 million, and the unemployment rate stands at 8.5 percent.

President Obama said the economy is still under severe stress.

BARACK OBAMA: Right now we’re still seeing a lot of job losses, a lot of hardships, people finding themselves in very difficult situations, either because they’ve lost their home, they’ve seen their savings deteriorate, and they’re still at risk of losing their job. So we’ve still got a lot of work to do.

MARGARET WARNER: The president promised additional action in the coming weeks.

And for some perspective on what this week’s developments say about the broader economic picture, we’re joined by Steven Pearlstein, a business and economics columnist for the Washington Post, and Nick Perna, managing director of Perna Associates, an economics analysis consulting firm.

Welcome, gentlemen, to you both.

Nick Perna, beginning with you, what do you make of these conflicting signs we’ve seen this week?

NICK PERNA, Perna Associates: They’re very characteristic of what I call the pre-recovery stage of a business cycle. What we’re getting is evidence that, if we’re all taking calculus, we would call it a point of inflection.

In other words, the economy is going from a very accelerating rate of decline to a smaller rate of decline, but it’s still declining. And there’s conflicting evidence, because not everything lines up at this point, but what it’s suggesting to us is that the economy should bottom out by the fall of this year, and recovery should start in terms of GDP this year, and labor markets next year.

Investors still very wary

Nick Perna
Perna Associates
All we're saying is that the GDP should stop falling sometime in the third or fourth quarter, and that jobs will continue to decline for a while, and the unemployment rate will continue to rise as we get into next year.

MARGARET WARNER: Is that what you see, Steve Pearlstein, that we're in a pre-recovery phase?

STEVEN PEARLSTEIN, The Washington Post: I think that's a little optimistic. For one thing, I think the financial sector has still got a couple of -- there's a couple of shoes to drop there, which we can talk about.

And then I think we will have a prolonged period in this country of really bouncing along the bottom, even when we hit the bottom, which we have not. I wouldn't expect that ordinary Americans would see the economy as recovering until the end of next year.

MARGARET WARNER: And why is that?

STEVEN PEARLSTEIN: Just because, when you come out of the biggest credit bubble bursting in the history of the world, with so much excess capacity in almost every industry of the economy, you know, it just takes a long time for companies to shrink, for industries to shrink, for people to go from their old jobs to their new jobs. There's just a very complicated set of transition, and investors are very wary.

MARGARET WARNER: So, Nick Perna, well, first of all, what's your response to that? And also to what Larry Summers said yesterday, which seems to be more in line with what you're saying, that this sense, he said, of a ball falling off a table or a freefall, that he was fairly confident that within the next few months that would no longer be the sentiment, or words to that effect?

NICK PERNA: Yes, and I think that the consensus of economists -- for example, there was a forecast survey that just came out yesterday, I believe, conducted by the Wall Street Journal, and in it, they describe a forecast that's very similar to the one I'm describing. I'm one of the participants, by the way.

But we're not saying that this thing is going to be over and that everything is going to be hunky-dory by the end of the year. No, all we're saying is that the GDP should stop falling sometime in the third or fourth quarter, and that jobs will continue to decline for a while, and the unemployment rate will continue to rise as we get into next year.

I think, as far as investors being very depressed at this point, the comment that was made by Steve, you know, the stock market is up better than 20 percent.

And the thing about the stock market that's important is that it has a history of being a very good indicator of when recessions are going to end. And one of the reasons for that is that it has the uncanny ability to help produce the forecast that it makes, because, when the stock market goes up, wealth increases, confidence goes up.

So it's no mystery that the stock market goes up, economy follows. It's not simply a matter of, you know, kind of biorhythms where this has always happened in the past. There is good reason to believe this.

Markets remain volatile

Steven Pearlstein
The Washington Post
But at the end of the day, in terms of the stock market, for example, if the profits are not there for the companies whose stock has gone up 25 percent, then the market will correct again.

MARGARET WARNER: All right, what do you make of the -- first of all, why have the markets gone up 20 percent in the last five weeks? And is Nick Perna right that it builds on itself?

STEVEN PEARLSTEIN: Well, there's no question that there's a self-reinforcing quality to things when they go up and when they go down. So good news begets good news, and it builds on itself.

But at the end of the day, in terms of the stock market, for example, if the profits are not there for the companies whose stock has gone up 25 percent, then the market will correct again.

What we're seeing is a pretty common thing. It's called a bear market rally. We have that all the time in bear markets. It tries, it tries. There's good news. In this case, the good news is that the banks may not be in as bad shape as everyone thought, and it was the bank stocks that really drove down the averages, and now the bank stocks have really rebounded. We'll see whether, in fact, that's the case.

And it's also true what Nick says. Look, the market, if it overshot on the way down, all it may be doing is going up to the point where it's at the bottom, and it's going to stay there for a while.

But my guess is that we are going to see some more testing on the downside here. There's going to be some bad news sometime in the next few months.

MARGARET WARNER: Like what?

STEVEN PEARLSTEIN: You know, if I knew, I'd be rich here. You know, I wouldn't be appearing on your program. But I don't.

MARGARET WARNER: I hope you would still.

NICK PERNA: Oh, you can tell us. Come on.

STEVEN PEARLSTEIN: And nobody really does. But, trust me, there's two shoes to drop, and I think they're important ones, and we can talk about them, Nick.

One of them is the commercial real estate. We have not seen the full effect of what is probably a 40 percent decline in the value of office buildings, and shopping centers, and warehouses.

The second thing is that there is a lot of bad corporate credit out there that hasn't defaulted yet, but that, even if past averages hold true for this recession, we're going to have a lot of corporate defaults, and that is really going to hurt the financial system again, and you'll see that in the stock market.

Wall Street recovery slow process

Nick Perna
Perna Associates
It's going to take us years to get back to 14,165 on the Dow, which is where we were in October of 2007. I don't know how many years, but it's certainly not a matter of a couple of months or even a couple of years.

MARGARET WARNER: Nick, do you agree with that, Nick Perna, that there are still some unrealized losses out there and potential disasters?

NICK PERNA: Yes, I think that's an important point. And I think, though, that -- two perspectives on it.

One of them is that some things are starting to get better and, you know, we've had a pickup in home buying. We've had little signs that house prices are not falling as rapidly, may even be rising in some parts of the country. So that means that the losses in those segments of the financial sector will be getting smaller.

But I think it's important to understand that maybe we're not as far apart -- all I'm saying is that we're close to making a bottom and that the economy should go from declining to rising. I'm not saying that this is going to be the recovery to end all recoveries.

You know, it's going to take us years to get back to 14,165 on the Dow, which is where we were in October of 2007. I don't know how many years, but it's certainly not a matter of a couple of months or even a couple of years. It will probably take a longer time than that.

MARGARET WARNER: Finally, but explain -- I mean, to most people at home, though they might have a 401(k) and be mildly cheered here -- unemployment, the fear of unemployment, of someone in their family losing a job, if they haven't already, is paramount. All the polls show this, Steve.

Why -- I mean, all these forecasts, even the ones that say the recession, in terms of GDP, should bottom out third quarter of this year, all say it's end of next year before unemployment starts improving. Now, why is there that big a lag?

STEVEN PEARLSTEIN: There just is. It takes a -- you know, people who run businesses are human beings, too. And they wait as long as they can to lay people off, and then they have to do it.

And then -- here's the real problem -- you know, there's always some people losing jobs in an economy, but there's always people being hired. The problem at the end of a recession is nobody is being hired, and so there's a natural churn, but it's only half of the natural churn. The natural hiring does not go on.

People are very reluctant to hire permanently, because when you hire permanently, it's sort of permanent, so you use temporary employees, you use overtime, and it takes a long time. That's why it's a lagging indicator.

Unemployment a lagging indicator

Steven Pearlstein
The Washington Post
The reason the '90s recoveries were jobless was because they came out of recessions that were caused by bursting of asset bubbles, real estate bubbles, stock market bubbles, and that's the characteristic.

MARGARET WARNER: And, Nick Perna, your thoughts on unemployment. Do you agree there will be that big a lag?

NICK PERNA: Yes, but I think what's really interesting is that this long lag has only followed the last two recessions, which were the mildest on record. If you look back at all the post-war recessions, post-World War II, prior to that, the lags were very short.

So the jobless recovery is a phenomenon of the early 1990s and the early 2000s. And, you know, it could be that we'll be surprised that, after a very deep recession, we might come back sooner.

I'm not forecasting that; I'm forecasting that there will be a lag. But this is something that's more new than born about by all the history of recessions.

MARGARET WARNER: We're almost out -- we are out of time. But go ahead. Quick final thought?

STEVEN PEARLSTEIN: The reason the '90s recoveries were jobless was because they came outof recessions that were caused by bursting of asset bubbles, realestate bubbles, stock market bubbles, and that's the characteristic.Those were not the characteristics of the 1950s' and '60s' recessions,which were a result of what economists call inventory swings.

MARGARET WARNER: All right. We have to leave it there on "inventory swings." Steve Pearlstein, Nick Perna, thank you both.

STEVEN PEARLSTEIN: OK.

NICK PERNA: Fine.