As downturn eases, economy gets hard to read

John W. Schoen Senior producer • Profile • E-mail

There seems to be general agreement that the steep slide in the global economy and financial markets is slowing down. There’s little consensus, though, on what happens next.

Has the stock market really bottomed out? Is the recession winding down, with the economy headed for recovery later this year? And why has the outlook gotten so muddy just when all these “green shoots” started popping up?

“Whenever you’re in a business cycle adjustment, which is what we're in,  gauging the whole path of the economy becomes extremely difficult,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight, an economic advisory firm.

Just as it took almost a year to declare that the current recession had begun, the economy likely will be well on the road to recovery before a bottom is declared. As the bottom of any economic cycle approaches, the signals are almost always mixed, with some data showing a positive trend and other indicators continuing to fall.

Some of those uptrends may turn out to be “false bottoms” — three months of improvement in, say, retail sales might be followed by another sharp drop. That’s why some economists have begun talking about a “sawtoothed” recovery: The graph of economic growth may not snap back like a V but follow more of a wavy line that gradually trends higher. This kind of pattern makes it even harder to proclaim “the bottom” until it's receding in the rear-view mirror.

The International Monetary Fund said Wednesday that the U.S. economy would shrink 2.8 percent in 2009 and show no growth at all in 2010, although the downturn will be even steeper in Europe.

Any economic forecast has to take government policies into account; it’s tough to find modern historical precedent to the government’s multitrillion-dollar response to the current recession. It’s even tougher to predict the course of future government policies. Given the strong backlash on Capitol Hill to the $700 billion bank bailout, the Treasury will have a tough sell getting more money, even if the banking system seizes up again.

Local economics
A lot will depend on where you live. Just as the recession didn’t arrive in all parts of the country at the same time, it will leave some regions before others. That may help explain why two top Federal Reserve policymakers last week offered sharply different economic forecasts.

Dennis Lockhart, president of the Atlanta Fed, told an economics conference he expects the recession to end by midyear with growth slowly picking up in the following months.

San Francisco Fed president Janet Yellen, on the other hand, said that while she expects “slow and tentative growth” later this year, she doesn’t think the U.S. economy is out of the woods.

Even a relatively mild recession presents challenges when forecasting — or even recognizing — an upturn. When economic data point in the same downward direction month after month, the likelihood is pretty strong that the next month will bring bad news. But as the bottom approaches, the data can be subject to frequent shifts, flashing hopeful signs one month and disappointing the next.

That’s one reason economists tend to dismiss one-month moves and rely more on a three-month moving average. A “surprise” number may be a statistical anomaly, influenced by seasonal factors. Three-month averages also help correct for inevitable and frequent revisions in past months' data. (Alas, the popular news media tend to focus more heavily on those one-month numbers.)

When the economy does hit bottom, that only means it has stopped shrinking. Until it begins growing strongly again, adding substantial numbers of jobs, it will still feel like a recession to most people. Though many forecasters expect growth to begin by the end of this year, unemployment is expected to keep rising well into 2010.

Even when employers begin hiring again, it will take a long time to absorb the five million or more people who have been left jobless by the severe downturn. As long as unemployment remains high, the pressure on confidence and consumer spending will remain.

In addition, consumers will still have to recover from the loss of trillions of dollars in wealth from the collapse of the stock and housing markets. It also remains to be seen what will replace the trillions of dollars in phony credit that helped drive the economy during the boom.  Some economists are talking about a recovery that “resets” the economy to a lower level of gross domestic product.

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

Obama warns of 'double-dip recession' One in four metro areas in recovery mode Geithner warns lack of loans may slow recovery Of bats and billions: Following stimulus funds As stimulus funds trickle down, debate heats up Commercial real estate bust looms NYT: Ex-homeowners forced into shelters Red Tape: Fees, not loans, help banks recover Recession ends in 79 metro areas Economists: The Great Recession is over, but ... Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: