Good Riddance, Recession?

National economic forecasters claiming the recession is over - or perhaps on its last wretched leg - may very well be right, say economists at Springfield's universities, but they caution that the bleeding may continue for many American businesses.

Nine out of 10 private economists who participated in the Blue Chip Economic Indicators survey released Aug. 10 thought the recession - one of the longest and most acute in U.S. history - would conclude some time this quarter. And a handful of economists have recently made the news with bold declarations that the recession is no more.

Dennis Gartman, publisher of the Gartman Letter, told Fortune earlier this month that the recovery phase began in July. He cited a downward spike in weekly jobless claims and the ratio of real-time to lagging economic indicators issued by The Conference Board, a New York-based nonprofit that analyzes economic data and trends. Using those two indicators, Gartman rightly predicted in fall 2007 that the U.S. was entering a recession.

But local economists who spoke with Springfield Business Journal were reluctant to write the Great Recession's obituary just yet, although they largely agreed that the economy seems to have scraped its lowest low.

"I think we've hit the bottom, and we're on the way up," said Bill Rohlf, a Drury University economics professor serving as interim director of the Breech School of Business. "Whether the recession is officially over or not, I kind of doubt."

Reed Olsen, an economics professor at Missouri State University, was similarly skeptical.

"I think that's overly optimistic," he said, suggesting the recession could spill into the fourth quarter.

Olsen - along with MSU economics professor Tom Wyrick - said too much emphasis has been placed on the U.S. unemployment rate, which dropped one-tenth of a percent to 9.4 percent in July.

Wyrick noted that the lagging indicator's slight improvement is tenuous, and Olsen pointed to a disconcerting figure that he said has largely been ignored: the number of Americans unemployed for 27 weeks or more increased by 584,000 in July to more than 5 million. Reed also noted that 247,000 jobs were lost in the quarter, but that 422,000 stopped looking for employment during the same period.

"People left the labor force in larger rates than people lost their jobs," he said.

Like many of his colleagues, Wyrick is eagerly awaiting new data to gauge whether economic recovery has truly begun, and if so, how it's taking shape.

"The really interesting question at this point is, 'What happens next?'" he said. "In the last two recessions that we had, the economy reached that leveling-off stage and stayed there for a year."

Reading the economy

Simply put, a recession is a decline in gross domestic product for at least two consecutive quarters, but the National Bureau of Economic Research defines a recession as a significant decline in economic activity spread across several months with noticeable drops in production, employment and real income. The last recession, which spanned eight months, occurred in 2001.

The current recession - now in its 21st month - has been defined by a housing market crash, flagging financial markets, mass layoffs and government-funded bailouts. The result, according to local economists, is an anxiety-ridden consumer base that includes 14.5 million people who no longer have a steady paycheck.

In addition to monitoring the GDP and jobless rate, the panel of economists Springfield Business Journal spoke to reached a consensus on consumer confidence as a key indicator of economic recovery. Olsen noted that two-thirds of the U.S. economy is based on consumer spending, and Wyrick said Americans are still hesitant to buy big-ticket items.

"Confidence is everything," Wyrick said. "You don't have to have confidence to eat breakfast. You don't have to have confidence to put gas in your car. But the confidence has got to be there or you won't put your name on the dotted line to buy a new $20,000 car or build a factory. ... That's a feeling that's going to have to be pervasive across America before we have a real recovery."

Improved consumer confidence alone, however, isn't enough to pull the plug on a recession. The GDP must drag itself out of negative territory this quarter, and economists expressed mixed views about the 1 percent decline exhibited last quarter.

Wyrick reminded that quarterly GDP figures are revised twice and that the finalized number is still months out. But Evangel University economics professor Jerry Owens said there's always the possibility that the figure could be revised upward.

"I think we might get a slight - and I say slight - positive real GDP that second quarter," Owens said. "I think July was the trigger point."

On the employment side, though, local economists agreed that employers would continue to shed jobs in 2009. Owens said he wouldn't be surprised if the U.S. unemployment rate hits 10 percent.

Economist David Mitchell, director of MSU's Bureau of Economic Research, said struggling companies - especially those in the manufacturing and construction-related sectors - would be among the last to feel the effects of a turnaround.

"Some people in certain industries will say, 'What are you talking about the recession is over? It's still going on,'" said Mitchell, who thinks permanent job loss in some sectors is highly probable. "A lot of these jobs are gone. ... Especially with some of the bills that are being passed through Congress that are fairly business-unfriendly, a lot of these businesses are not going to be all that likely to rehire."

Rating the government response

Four of the five economists interviewed by SBJ said the Obama Administration's stimulus package missed the mark, but all five gave the Federal Reserve high marks for slashing interest rates to jump-start lending.

While the federal government's stimulus likely prevented a more devastating recession, the strategy is fraught with mistakes, said Olsen, who noted that only about 10 percent of the stimulus money has been spent.

"You're stimulating the economy now with money that you're going to be spending over the next 10 years," he said. "That's always the problem with fiscal policy: It's too late, and politics gets in the way."

Wyrick called the $787 billion recovery plan a "big spending package" that has advanced Obama's agenda of health care reform and renewable energy more than it's stimulated the economy. Wyrick did, however, note that the government spending should double as an insurance policy against a "double-dip recession," when a short period of recovery is followed by another downturn.

Drury's Rohlf said the stimulus funding in the pipeline should provide a nice boost for the economy that previous recessions haven't enjoyed, and he warned against any moves to halt the flow of federal dollars. "Let's not lose everything we've gained by pulling out too quickly," Rohlf said.

Mitchell said he's concerned the ongoing stimulus program will do its part to drive up inflation - perhaps as much as 3 percent to 5 percent in 2010. Until recently, most economists had been worried about deflation tied to the ongoing recession.

Owens at Evangel said a better way to stimulate the economy would have been tax cuts. Some of that extra income would find its way back into the economy, although more Americans are realizing the importance of saving and paying down debt, he said.

"That's not a bad thing to change habits, but I don't know if it will last," Owens said. "It would be a good thing if we would learn from this."