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Will 2010 Bring a New Recession?

January 5, 2010 at 12:00 AM EDT
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Stocks are making gains, but new jobs remain elusive. Judy Woodruff asks a panel of experts whether 2010 will be a year of economic recovery, or merely the start of a double-dip recession.
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JUDY WOODRUFF: Finally tonight: the economy.

In the early days of this new year, we have seen a string of conflicting signals about the state of the economy, and today was no exception. In a sign that the housing market remains weak, a National Association of Realtors monthly index, which tracks the number of homes under contract, fell by 16 percent in November, a sharper decline than economists had expected.

On a more positive note, the Commerce Department reported that new orders at U.S. factories rose by over 1 percent in November. That comes a day after news that factory activity in December rose to its highest level since April 2006. Recent jobs numbers have also been mixed. While the unemployment rate remains in the double digits, new jobless claims dropped last week.

So, what does it all mean? Is the economy on track for a strong recovery? Or will we remain stuck in a slump?

Well, we get two takes. Robert Barbera is chief economist for ITG, a research and trading firm. And Dean Baker is co-director of the Center for Economic and Policy Research.

Gentlemen, thank you both for being with us.

I want to start with you, Robert Barbera.

You believe that the country is on the cusp of a real recovery. What do you base that on?

ROBERT BARBERA, chief economist, ITG: Well, I think the giant challenge for the Obama administration was to rescue the banks and to get the financial system back in order.

And it was a giant challenge. Interest rates were already at zero. But I think they succeeded. And that panic that really took hold throughout the country, throughout the world is in recess. And, as a consequence, I think that’s the backdrop that you need to get a genuine recovery.

JUDY WOODRUFF: Dean Baker, you see it differently. And he’s basically saying, they rescued the banks; that’s a good sign.

DEAN BAKER, co-director, Center For Economic and Policy Research: Yes.

Well, I was just at the American Economic Association Convention in Atlanta. And you had a lot of people running around saying, well, we prevented the Great Depression. And that’s good, but that’s a rather low bar. And I should also point out every other country in the world managed to avoid the Great Depression as well.

What people are concerned about is, are we creating jobs? Are we getting the unemployment rate down? And I see a story in which we will probably see growth, but very, very weak growth. And we’re likely to see the unemployment rate hovering near 10 percent and probably going above it, certainly through 2010 and likely into 2011.

JUDY WOODRUFF: So, you’re focusing on unemployment, on unemployment, whereas Mr. Barbera was focusing, as he said just then, on the banks? Explain.

DEAN BAKER: Well, I mean, my concern is jobs. I mean, for most people, that is the economy. You know, they’re happy to know that the financial system is relatively sound, so we aren’t going to be reading about a big bank going bust tomorrow. And that’s, of course, good news.

But what really matters to most people is, are they — are they secure in their job? Are they — do they have a good job? And that’s not a good story for most people.

JUDY WOODRUFF: What about that, Mr. Barbera?

ROBERT BARBERA: Yes, I actually — yes, I think I agree with Dean very much, in the sense that jobs are key.

The take I have, which is not the conventional wisdom right enveloped, is that the panic that enveloped the economy late last year, or early last year and throughout much of year, was a panic about cash. You thought your banks might go bankrupt. You thought they might pull your wires, and so you slashed inventories, and you also slashed your work force.

And if you look at the data in terms of the amount of job decline over 2009, it was wildly in excess of what you would have expected based on the GDP decline. Most everybody expects a snapback for inventories. I do, too. But I think you’re going to be surprised about the snapback for employment.

As somebody who sort of has to deal with the details of the monthly pulse of the numbers, if you look at that sharp decline in jobless claims, that surge in the Purchasing Managers Index, those traditionally are followed by material gains for payrolls.

So, I think, in 2010, quite distinct from Dean, you’re probably going to create more than 2.5 million jobs. And, so, the number-one issue is jobs, but I think we will be creating them.

JUDY WOODRUFF: It sounds like he’s saying they have cut to the bone. They have inevitably got to create jobs.

DEAN BAKER: Yes. Well, I think we certainly are seeing a slower rate of decline. But, you know, for example, taking the jobless claims, we were up around 650,000 a week. But there’s still around 450,000. That’s higher than is consistent with job growth.

So, if we go back to the last recession, we didn’t actually start creating jobs until jobless claims fell under 400,000 a week. So, we’re still in area where I think we’re looking at losing jobs in the month of December and probably in the first couple of months of next year.

Or — I’m sorry — we’re in 2010 now, this year. And, in terms of expecting strong growth, inventories, we will see a bounce there, but much of our inventory accumulation is going to come from imports. So, that’s not going to stimulate our economy. It will stimulate other countries’ economies.

And, ordinarily, what you expect to really fuel a rebound is housing and autos. And I just don’t see that happening.

JUDY WOODRUFF: You made several points here.

What about the fact that a lot of this would hinge, as Dean Baker just said, on — on imports, which doesn’t benefit U.S. companies?

ROBERT BARBERA: Well, if you look at the swing for inventories and the swing for imports, basically, what I expect is about a 2 percentage point swing for inventories. You will give a third of that back to imports. But that still gives you a pretty important advance.

In addition, if you look at those jobless claims numbers, or if you look at the job numbers, you know, my dad is a physicist. And he says it’s a second derivative world. It’s the change in the change that you want to keep an eye on.

The average change in payrolls over the last nine months is a 75,000 improvement. At that rate, we will be at 250,000 by the spring. And if we run 250,000 to 300,000, we get something on the order of 2.5 to three million jobs. That line has been very powerful.

It’s true it was sharply negative at the beginning, but it’s been an important improvement. And — and I’m betting that that trend will continue. So, I’m not imagining a trend. I’m simply wagering that the trend continues.

JUDY WOODRUFF: I will stay out of the physics point. But what, how do you respond?

DEAN BAKER: Yes, well, I don’t expect the trend to continue.

I mean, we had some sort of one-time boosts. Home sales, for example, were boosted by the first-time-buyer’s tax credit. That pulled a lot of home purchases forward. So, people who might have bought this year instead made their purchase before, when they thought the credit would expire back in November.

The stimulus, we felt the peak impact from the stimulus back in the third quarter. We’re still feeling it this quarter. That will start to wear out over the course of the year. And then we’re going to have real contraction associated with state and local governments that are going to make cutbacks, because they all have huge budget deficits.

So, I see a lot of downward pressure on the economy yet to come.

JUDY WOODRUFF: Robert Barbera, what about all those? I mean, just to name a few, the housing point is…

ROBERT BARBERA: Well, let’s — yes. I think there’s an old joke. When you have some stimulus, are you building a bridge or a pier, OK? Do you get over a hump and into the promised land of self-sustaining recovery, or does the economy collapse after the stimulus disappears?

We look at one sector where you got news today, the auto industry, we had the cash for clunkers. You got a pop for sales. And people were quite worried that you would fall back to those sharply negative numbers in the fourth quarter. We didn’t. The number looks like 11.2 million for December. And, in fact, GM announced that their production in the first quarter on a year-over-year basis will be up 75 percent.

For the industry overall, it looks like it will be up 50 percent. So, you have got some improvement there that is significant.

One of the big…

JUDY WOODRUFF: Well, let me stop you there and get Dean Baker to respond on that point.

ROBERT BARBERA: Sure.

DEAN BAKER: Well, you know, again, we’re up from extremely low levels — 11.2 million, we would be deploring as horrible if we go back a couple years ago and we’re looking at 17 million sales a year. So, you know, we were at incredibly low levels. We are up from that, but this is still well below what we consider normal output levels.

ROBERT BARBERA: No question. But, again, we’re talking about growth rates.

Is the economy going to grow at a good level, at a good rate? And will it generate jobs? I say, yes, it will grow at a good rate. Yes, it will generate a fair amount of jobs. You’re absolutely right. At the end of that 12 months, the unemployment rate is probably 9 percent, very disappointing. Auto sales are probably 12.5, very disappointing.

But it’s much stronger than the trajectory you’re describing for either the overall growth rate or for the growth in jobs.

DEAN BAKER: Well, again, I see the sources of weaknesses. The non-residential construction numbers that came out yesterday were very weak. We have a collapsing bubble there that I think people haven’t fully appreciated the implications.

And when the housing market weakens, that takes away people’s wealth. And we’re going to see more of a negative wealth effect. People can’t consume because they have negative equity. So, I see a lot of downward pressure yet to come.

JUDY WOODRUFF: Help us understand what’s at the core of the difference here. Is it just the way the two of you are looking at the same numbers?

DEAN BAKER: Well, I mean, obviously, we’re focusing on different numbers.

ROBERT BARBERA: Well, forecasting is a black art, first of all. I think forecasting is a black art. You’ve got to understand that, right?

And I would simply point out that, if you go back to the last two deep recessions, go back to late 1982 or late 1974, early 1975, it is the nature of a deep recession to give you a very long list of horrible things to think about. And, as a consequence, the consensus coming out of a deep recession always says very meager recovery. It makes a lot of sense. It’s just been a horrible way to forecast.

JUDY WOODRUFF: Dean Baker, a brief response.

DEAN BAKER: Yes. Well, this is a qualitatively different recession. It was brought about by the collapse of the housing bubble ,which the past recessions have not. And I think it’s going to be extremely hard to recover from.

JUDY WOODRUFF: Dean Baker, Robert Barbera, we’re going to have to leave…

ROBERT BARBERA: Well, they’re all different. They’re all different.

JUDY WOODRUFF: Gentlemen, we thank you both. We appreciate it.

DEAN BAKER: Thanks for having us.

ROBERT BARBERA: Thank you.