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Rant & Rave Blog

A Reality Check for Economic Optimism 'Improvement' Merely Means the Decline Is Slowing

Posted by InTheMoneyStocks.com Tuesday, April 28, 2009, 08:00PM ET

Read 254 times

A Reality Check for Economic Optimism 'Improvement' Merely Means the Decline Is Slowing
Seemingly everyone from President Obama to top Federal Reserve officials to cable TV talking heads has been talking lately about signs that the economy could be stabilizing.

Yet companies are laying off employees at a record pace, the financial markets remain a mess, and this morning the government is widely expected to announce that the economy shrunk at an extraordinary pace in the first three months of the year. (Economists have estimated that gross domestic product fell at a 5 percent annual rate.)

The reason for the seeming disconnect has to do with the various benchmarks by which the economy can be measured. There's the level at which it is functioning -- how many people have jobs and how much the nation produces. There's the direction it is going -- whether those numbers are growing or shrinking. And there is the speed with which it is changing.

The improvement that Obama and economists inside and outside of government are talking about is, so far, limited to the third category. The economy still appears to be in decline, but it seems to be declining slower than it was at the end of last year and beginning of 2009.

"The thunderstorm has passed, and we're still getting some light rain, and there are glimmers of sunshine on the horizon," said John Silvia, chief economist at Wachovia. "It's still raining, but we're past the worst of the storm."

Or, to use another metaphor, think of the economy as a bathtub. The goal is for the tub to be full -- for the economy to produce as much in terms of goods and services as the size of the labor force and technology will allow, and to operate at full employment, with almost everyone who wants a job able to find one.

Right now, the bathtub is far from full. It has been draining since the recession began 16 months ago, and the unemployment rate, now at 8.5 percent, is about 3.5 percentage points higher than it would be if the tub were full. The tub is still losing water but looks to be draining slower than it was a few months ago.

So what comes next? Optimists think that over the next few months, the combined impact of government spending, healing in the financial sector and Federal Reserve interest rate cuts will get the economy moving again.

Pessimists, on the other hand, think that, given the damage the economy has incurred, it will keep shrinking, if at a milder pace, for many quarters.

Neither of those scenarios would mean that the economy will return immediately to its full potential. Indeed, even some relative optimists believe that the unemployment rate could remain elevated for four or five years, even once it starts to come down.

Think about the last recession. It started in March 2001, ended by November of that year and was relatively mild. Still, 2002 felt like a bad year, and the job market in particular didn't start to feel substantially better until late 2003. It takes time, once the economy falls below its potential, to catch back up to full employment and full potential output.

By Neil Irwin
Washington Post Staff Writer
Wednesday, April 29, 2009

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/28/AR2009042803457.html



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