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Recession Shows Signs of Easing Grip on U.S. Economy

July 31, 2009 at 1:03 PM EST
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New economic figures hinted that the U.S. recession could be slowing down. Jeffrey Brown gets analysis from a banker and a journalist.
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JIM LEHRER: There was news today that raised hopes the recession could be ending. The Commerce Department reported economic activity was down less than expected in the second quarter.

The gross domestic product slipped 1 percent from April through June. It had fallen more than 6 percent in the first three months of the year.

The report also made clear the economy was weaker in 2008 than first reported.

At the White House, President Obama said again his stimulus policies have helped, but he said a recovery has not yet begun.

U.S. PRESIDENT BARACK OBAMA: You need to have economic growth before you have job growth. And today’s GDP is an important sign that the economy is headed in the right direction and that business investment, which had been plummeting in the last several months, is showing signs of stabilizing.

This means that eventually businesses will start growing and will start hiring again. And that’s when it will truly feel like a recovery to the American people.

JIM LEHRER: Today’s report also showed consumers pulled back on spending in the second quarter. That finding left Wall Street searching for a direction. The Dow Jones Industrial Average gained 17 points to close at 9,171, but the Nasdaq fell more than 5 points to close at 1,978. For the month, the Dow gained more than 8.5 percent; the Nasdaq rose nearly 8 percent.

Now, Jeffrey Brown continues our lead story coverage of the economy.

JEFFREY BROWN: And for that, I’m joined by Stuart Hoffman, chief economist and senior vice president at PNC Financial Services, and Daniel Gross, financial columnist for Slate and senior editor at Newsweek. He wrote the magazine’s latest cover story on the state of the economy.

Stuart Hoffman, what is the GDP report telling us about economic activity now? Start with the good news.

Pulling the Economic Ripcord

Stuart Hoffman
PNC Financial Services
The second-quarter report is sort of like finally somebody pulled the ripcord, and the chute opened, and the economy is still coming down, but I think we're nearly on the ground and at the end of this.

STUART HOFFMAN, PNC Financial Services: Well, the good news is the economy still declined in the second quarter by 1 percent, a little less than expected.

But back in the winter quarter, late last year and the first quarter of this year, that rate of decline was around 5.5 percent to 6.5 percent. That was sort of like a freefall, the feeling like you're skydiving.

I think what happened in the second-quarter report is sort of like finally somebody pulled the ripcord, and the chute opened, and the economy is still coming down, but I think we're nearly on the ground and at the end of this -- the tail end of this very long and painful recession.

JEFFREY BROWN: And what does that mean, Stuart Hoffman, in terms of business activity? That means that they're not cutting back as much as they were? They're still cutting, perhaps, but not as much as before?

STUART HOFFMAN: That they will still be cutting jobs. I suspect we will hear over the summer months continued loss in jobs, a further rise in the unemployment rate. That usually lags by a quarter or two an upturn in GDP. I think we will have a positive, at least a flat to positive GDP number.

Where we're already seeing businesses do some upturns is in the automobile industry, of all places, one of the long suffering. They got inventories so low, and with G.M. and Chrysler now boosting production, we're actually seeing autos and automakers and truckers that truck the cars around, seeing an improvement in the last month or so, not in the June data, but in the July data that will be reflected in, of course, the third quarter economic report a couple of months from now.

JEFFREY BROWN: And, Daniel Gross, what do you see in today's numbers, pro, but also on the downside? I note that consumer spending, for example, still took a hit.

Incremental Progress for Consumers

Daniel Gross
Newsweek
The real severity of the decline in the fourth quarter and the first quarter, where things really ground to a halt, and now we're starting to see incremental kind of progress on top of that very low baseline.

DANIEL GROSS, Newsweek: Sure. Well, the things that drive our economy, that have driven it are still in neutral, the consumer not doing particularly well. You look at residential construction. Home-related things, which really drove the last boom we have, are still net detractors from GDP.

I think what we learned from this is not just that the economy is somewhere closer to flat than it was, but the real severity of the decline in the fourth quarter and the first quarter, where things really ground to a halt, and now we're starting to see incremental kind of progress on top of that very low baseline.

JEFFREY BROWN: Now, staying with you, Daniel, what about -- focus in, though, a little bit more on the consumer. Because in the past, we always were told that it was the consumer that was driving the American economy. Now, if you have this moment where things may not be quite as bad as they were before and yet the consumer hasn't quite come around, what does that tell us?

DANIEL GROSS: Well, if the consumer is 70 percent of the American economy, some of the details in this report indicated that the savings rate, which was at 0 percent a couple years ago, increased further in the second quarter to about 5 percent.

So people are fearful. They are stockpiling cash, rather than spending it. They're worried about their jobs, which, you know, they should be, given where unemployment is. And so I don't think the prospects of a consumer-led rebound are great for, you know, the next couple quarters.

JEFFREY BROWN: And, Stuart Hoffman, another thing people look at, of course, is the stock market, which in the last few weeks has been going up, up, and up. What do you make of that?

Stock Market as a Leading Indicator

Stuart Hoffman
PNC Financial Services
I agree that consumer spending won't be strong, but it's good to be talking about and debating how strong or weak the recovery will be rather than how deep and severe the recession will be.

STUART HOFFMAN: Well, the stock market's a classic leading indicator. It actually hit bottom in March. And as Dan said, if the economy was in that freefall feeling and the market wasn't sure, I think the fact that the market has regained some part of the ground since March and has had a good couple of weeks, it's like a scout. It went out scouting for an economic recovery, and I think it's finding one.

I agree that consumer spending won't be strong, but it's good to be talking about and debating how strong or weak the recovery will be rather than how deep and severe the recession will be.

And while I don't think the recovery will be strong, I'll take a weak and I think the stock market would like to take a weak economic recovery over a strong recession any day.

JEFFREY BROWN: Well, let's look a little bit more, talk a little bit more about what the recovery might look like, whenever it comes.

Daniel Gross, that was the emphasis of your article in Newsweek about, OK, maybe we're at the end of this recession, maybe not, but the recovery is going to be a little different from what we've experienced in the past, right? What do you see coming?

DANIEL GROSS: Well, you know, the great challenge we have is that the tools we have historically used to get out of recessions and kick back into growth -- which are the Federal Reserve cutting interest rates, broad-based tax cuts, Wall Street kind of financing everybody so they could spend -- those are not available to us.

Interest rates have been at effectively zero since last September. We're not going to have big tax cuts. Wall Street learned its lessons from providing too much financing. So we have to look to something else.

Is there going to be a big boom, a la the Internet or housing, that is going to touch many sectors of the economy that will propel us to a higher rate? Or are we going to have to content ourselves with sort of small and moral victories, looking to businesses here and there starting jobs, looking to specific areas of government policy, like the cash for clunkers program, which really stimulated a lot of car buying.

The Obama administration is counting on a series of targeted government investments in infrastructure, green technology, things like this auto program to get jobs going in the short term and also to get the economy more competitive in the long term, but it's an open question as to whether that will work.

Possibility of Double Dip Recession

Daniel Gross
Newsweek
They are going to be throwing everything they can at this economy to get it growing, just as they did last fall and over the winter to keep it from going into freefall.

JEFFREY BROWN: And, Stuart Hoffman, you know, when you think specifically about jobs, all those millions of jobs that have been lost in the last year or so, is there a formula or a consensus as to how much the economy has to grow in order to start pushing the job numbers back up or the unemployment number back down, rather?

STUART HOFFMAN: Yes. I would say that that formula, it's not a magic secret, but somewhere around 3 percent for real GDP growth, so it fell 1 percent in the spring quarter, and that's why jobs continued to fall.

I think it will be flat to up a little this quarter, but I do think it will grow 3 percent next year. That's why I'm forecasting an upturn in jobs, not a rapid one, but an upturn in jobs in the first quarter of next year, continuing through 2010.

But admittedly, yes, we're not going to have a real strong rebound in jobs. They won't go up anywhere near as fast as they've gone down over the last year-and-a-half, unfortunately.

JEFFREY BROWN: And, Daniel Gross, of course, there still are some economists who continue to think that there's the possibility at least of a so-called double dip recession, that is, we might -- things might get better for a while, but they may drop down again.

DANIEL GROSS: That's always the possibility. I think, however, that the policy responses we've seen from the Federal Reserve, and from Congress, and the White House, who were all sort of on the same page, at least when it comes to the need to stimulate economic growth, we saw a really rapid response last fall throughout this year.

I think there's going to be a great deal of vigilance. They are going to be throwing everything they can at this economy to get it growing, just as they did last fall and over the winter to keep it from going into freefall.

JEFFREY BROWN: And, Stuart Hoffman, a last word. What do you think about the prospects of this so-called double dip recession?

STUART HOFFMAN: Well, I don't think that's likely. We haven't yet gone up to talk about a double dip. It looks like we're about to rise, but I think the economy growth will be sustainable. I don't think it's likely we'll just have one quarter or two quarters of growth and then go right back down again.

The other good news is in report is that inflation is low. That's also an important part of keeping the U.S. economy -- and one thing I would add to the good list that Daniel gave is the world economy. We're seeing growth in China, even Japan, and perhaps a little later in Europe.

So not only do I think the U.S. economy can have a sustained economic recovery, albeit modest, I think it will actually spread around the globe as we go throughout the next year to year-and-a-half.

JEFFREY BROWN: All right, Stuart Hoffman and Daniel Gross, thank you both very much.

STUART HOFFMAN: Thank you.

DANIEL GROSS: Thank you.