As Christina Romer settled in to provide the latest economic update for U.S. lawmakers last week, they no doubt braced for another round of brutally frank and frankly chilling discussion on the state of the world’s most powerful engine of wealth. Despite Romer’s clout within President Barack Obama’s inner circle—shortly after the election he asked the Berkeley economics professor and expert on the Great Depression to chart America’s path to recovery—few outside of Beltway policy wonks and Wall Street economists knew much about her. On the surface, her comments seemed to reinforce the grim outlook that’s become so pervasive since the economy went into free fall last autumn. “I’m sorry to say, but in the short run, we are still in for more bad news,” she told the committee members. “We expect to see continued declines in employment and rises in unemployment.” Then came a rare yet welcome but. “We are beginning to see glimmers of hope that the economy is stabilizing.”
Romer’s tone was hardly exuberant, but her comments stood in stark contrast to the utter despair that was de rigueur just weeks ago. What’s more, she’s been joined by a host of sage old voices of the American economy, who together are offering a more reassuring, if cautious, message to the world: we’re not out of the crisis yet, but the worst seems to be behind us. Paul Volcker, the 81-year-old former chairman of the Federal Reserve and the head of Obama’s economic recovery advisory board, last week said the downturn is “levelling off” even if the U.S. economy remains in “intensive care.” Then, over the weekend at the annual Berkshire Hathaway annual meeting in Omaha, Neb., the company’s legendary founder and CEO Warren Buffett tried out another metaphor to convey his sense of cautious optimism. “Our economy, back in September, was like finding a friend of yours in quicksand up to his chest and he’s going down,” Buffett said. The rescue attempt has been painful but necessary. “The important thing was to get out of the quicksand, and we got out.”
That anyone is talking this way about America’s fortunes is remarkable. It was only two months ago that the word “depression” seemed to be on everyone’s lips. Some pundits even predicted that bloody wars would soon break out between collapsing nations, or that rioters would run wild in the streets of America. An overwhelming sense of declinism took hold as investors, companies and workers grappled with staggering losses. As Nouriel “Dr. Doom” Roubini, a professor of economics at New York University, and one of the first observers to accurately predict the financial crisis, famously wrote last November: “The decline of the American Empire has started.”
Or so it seemed. Lately, such anxieties have been drowned out by the roar of the markets. Over the past two months, major stock indices, such as the Dow Jones Industrial Average and Canada’s S&P/TSX composite, have steadily clawed their way back, rising as much as 35 per cent from their lowest points in March. Six months ago investors seized on any news, even when it was relatively positive, as a reason to flee the markets. Now, they’re running back with the same determination. At a time of deepening fears of a flu pandemic, worries over the financial viability of America’s biggest banks and even Chrysler’s bankruptcy, markets surged. The rally has already defied analyst expectations, and in the eyes of even some optimists, the laws of gravity. Many expect that some sort of pullback is inevitable. But even if stocks lose their upward momentum, it won’t necessarily change the view of those who believe the wider economy has turned a corner. No one is saying we’re in recovery mode yet, or even that the North American economy has stopped shrinking. But what many experts are sensing is that after the destruction of some US$50 trillion to US$70 trillion of global wealth, and the loss of millions of jobs, we’ve already endured the brunt of the bad news. “We’ve definitely seen signs that the worst is now behind us,” says Ian Nakamoto, the director of research at fund manager MacDougall, MacDougall & MacTier. “Now it’s time to begin the slow healing process. It’s like an athlete who gets injured. The injury can happen in a split second, but it can take years to heal.”
Which leads to two questions that, until recently, seemed foolish to even consider: what will a recovery look like? And what kind of economy will we have after the Great Recession has run its course?
To say it’s been hard to get a clear picture of where the economy is headed is a huge understatement. Since the downturn kicked into high gear last fall, with the collapse of some of the world’s largest financial institutions and the ensuing credit crunch, economists have been wading through a slew of numbers for any hint of when we might hit bottom. For months, those searches turned up signals that were nothing short of grim. Since the official start of the U.S. recession in December 2007, a staggering 5.7 million people have been thrown out of work. In Canada, where unemployment has hit eight per cent, some 357,000 jobs have been lost since October. At the same time, the economy has shrunk at an alarming rate. In the U.S., in the first quarter, GDP plunged by 6.1 per cent on an annualized basis. It was the first time since 1975 the country’s economy has shrunk three quarters in a row, all but assuring that this will be the worst economic decline since the 1930s. The Bank of Canada recently estimated that Canada’s economy contracted at a jaw-dropping annualized rate of 7.3 per cent in the first three months of the year.
With figures like these dominating the headlines, it has often felt like there was no bottom to find. Yet, in the arcane corners of the economy, hidden from most consumers, signs of hope have begun to emerge. Many are the types of stats that only economists can get excited about. For instance, Robert Gordon, a professor of economics at Northwestern University, recently declared the economy will reach its lowest level this month or next. He based his analysis on a historical link he’d uncovered between unemployment insurance claims and past economic cycles. Some have taken solace in China’s purchasing managers index, which showed marked improvements in April. The Federal Reserve Bank of Chicago’s own National Activity Index, a basket of 85 economic indicators in the U.S., hit bottom in January, notes Paul Kasriel, an economist at Northern Trust, who was among the first to predict the global recession. Others still read the U.S. Commerce Department’s latest release—the one with the stunning 6.1 per cent decline in GDP—and found good news in the fact inventories at companies have plunged, suggesting they may soon need to ramp up production to eventually restock warehouses. These are the “green shoots” so many analysts have talked about lately, the first signs of life after an economic winter.
But if you really want to understand why economists are suddenly smiling again, it comes down to two very important shifts in the U.S. economy. One has to do with the housing sector. It was America’s torrid love affair with real estate that got the country into this mess, so analysts have been closely watching for signs of life amid the ruins. Until recently, all they found was misery. In February, the S&P Case Shiller index, which tracks house prices in America’s largest urban centres, was down 18.6 per cent from the year before, and more than 30 per cent from its peak in May 2006. It’s gotten so bad that in some parts of the U.S. banks are opting to tear down newly built homes rather than pay property taxes and liability insurance on homes that can’t be sold. In Victorville, Calif., where city officials have begun levelling hefty fines against unfinished real estate projects, a Texas bank that owns 16 homes there has hired a demolition crew to knock them down. The good news is that with prices now returning to some semblance of normalcy, and with mortgage rates at record lows, buyers are tip-toeing back into the market. In several hard-hit markets in California, Nevada and Florida, house sales are up between 35 and 45 per cent, albeit from extremely low levels. This week the National Association of Realtors said pending sales of existing homes across the U.S. inched up from February to March—the second-straight monthly rise. “We need to see the housing market really bottom before we can see positive growth in the U.S., and that’s beginning,” says Sherry Cooper, chief economist at BMO Capital Markets.
In the same way house prices collapsed, the psyche of the all-important American consumer also cratered this past winter. Rising gas prices last year already had commuters feeling anxious about their prospects when the collapse of Lehman Brothers sent America into a deep funk. Mounting layoffs only made things worse, eroding confidence to levels not seen in three decades. This is crucial, because consumers account for 70 per cent of the U.S. economy, and it didn’t take long for their waning confidence to be reflected in empty shopping malls and car lots. Several big name retailers such as Circuit City and Linens N’ Things, their aisles empty of customers, have gone bust. And as Americans reined in their spending, it sent waves of economic damage around the world—from Canada’s auto plants and oil wells to China’s bustling factories, no one is exempt from the reckoning.
