5 Myths About an Economic Recovery

Surprise. That economic recovery we keep hearing about seems to be playing hide-and-seek.

Federal Reserve Chairman Ben Bernanke and others have said that, technically speaking, the recession is over. The stock market has been charging forward, with a 58 percent gain between the lows of March and a September peak. But companies keep cutting jobs, with the unemployment rate creeping up to 9.8 percent in September. It would already have hit 10 percent if not for discouraged workers who lost their jobs months ago and have stopped looking for work. Meanwhile, a lot of things could still go wrong, even if we pretend otherwise. Here are some of the misconceptions about the economic recovery:

The pain will subside. Sooner or later it will, but the pain could actually intensify over the next several months. That's because unemployment is expected to get worse until early or mid-2010. More laid-off workers will exhaust their unemployment benefits, forcing more drastic lifestyle cutbacks than they've made already. That will force deeper cutbacks in consumer spending and prolong a recovery. "The recession is technically over, but that means we're at the moment of maximum pain," says Dirk van Dijk of Zacks Equity Research. "If you're tumbling down a cliff, it hurts the most once you're lying at the bottom."

A recovery will be consistent and quick. We seemed to plunge into recession with reckless abandon, so it would be nice to think that once we've bounced off the bottom, we'll climb right back out. But that's not how recessions typically end. "Recessions are stop-and-go affairs," says economist Gary Shilling. "Seven of the last eight recessions have had at least one positive quarter before the recession picked up again." Instead of a pronounced recovery, it's more likely we'll muddle along for months, maybe even years.

There won't be another recession. Sure, economic growth is probably positive right now, which would technically indicate that the recession is over. But that doesn't guarantee that the economy will keep growing. A bust in commercial real estate is still in the beginning stages and could persist for a couple of years. Bank losses on mortgages and consumer loans are getting worse, not better. And few, if any, parts of the economy are strong enough to propel a robust recovery. Moody's Economy.com says the odds of a double-dip recession—another six months or more of declining economic activity—are 29 percent. That's lower than earlier this year, but not low enough.

Consumers are regaining confidence. Yes, confidence measures have improved over the past several months. But consumer confidence is very fickle and closely related to the job market, which is getting worse. The stock market rally has helped restore some lost wealth and generated hopeful headlines, but it could turn around and bring confidence down with it. Instead of an uninterrupted improvement, consumer confidence will probably drift upward over time in fits and starts, mirroring the sputtering economy itself.

Things will get back to normal before long. Don't count on it. Odds are that the Great Recession will force lasting changes in our quality of life. The twin miseries of a housing bust and stock market correction have wiped out an astounding $14 trillion in Americans' net worth, and that money isn't coming back soon. It could be 10 to 20 years before housing values have regained the peaks of 2006, and talk about a new bull market for stocks could be as hollow as those old predictions about the Dow hitting 20,000 or 30,000. And millions of consumers are simply tapped out, with too much debt and far too little savings for retirement or emergencies. If a miraculous recovery suddenly materializes, we'll all celebrate. But it's more likely that all these economic wounds will heal slowly, and leave scars.

Disclosure: No positions

Comments

[Joe Duggins:]

Using panel data for a large set of high-income, emerging market, developing, and transition countries, we find robust evidence that the large output loss from financial crises and some types of political crises is highly persistent. The results on financial crises are also highly robust to the assumption on exogeneity. Moreover, we find strong evidence of growth overoptimism before financial crises. We also find a distinction between the output impact of civil wars versus other crises, in that there is a partial output rebound for civil wars but no significant rebound for financial crises or the other political crises.
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Money without intelligence is like a car without a road.
www.intelligentinvesti...

Oct 02 07:58 PM

[LilBob:]

I'm glad that we're finally getting articles like this. The reality is that a "jobless v-shaped recovery" is an inherently oxymoronic phase in a consumer driven economy. This recession could very well turn out to be just like Japan's "lost decade", though maybe not quite as long or severe. A long slow L-shaped recovery is what we really appear to be in for. The Chinese and other Asian countries are not going to become big consumers of American made goods-what reason possesses anyone to believe that the people that we've been buying our consumer goods from will suddenly turn around and start buying stuff we make here? Oh that's right, the wealthier Chinese really like Buicks, one car company that's struggling in it's own country will only be a blip on the radar of the Chinese economy. Last months Cash for Clunkers skewed savings and spending numbers aside, I believe we are still in for a period of consumer retrenchment unlike anything we've seen recently. The winners will be those who get away from the science of wasting time via digital devices, or trying to market "image" goods and focus on high quality staple goods. Time to forget about i-pod accessories and designer handbags and focus on wool socks and tee shirts.

There's still money to be made in every market sector, but you must have a tight business plan and offer high quality goods. Flash and cache won't be enough to lure consumers.

Oct 02 10:04 PM

[Wayne Freeman:]

"Its all about jobs, stupid" The folks in power in Washington have yet to realize that, though. It was interesting listening to CSPAN earlier, where the September Unemployment Report was being discussed by the Joint Economic Committee. The principal guest was Dr Keith Hall, BLS Commissioner. The panel included Chair Rep Elijah Cummings (D-MD), Sen Klobuchar (D-MN) and Rep Kevin Brady (R-TX). The chair and the Minnesota Senator were banal. Rep Brady twice elucidated that companies large and small aren't going to begin hiring workers in this climate of uncertainty with large unfriendly burdens imposed by the new congress in costs of energy, utilities, taxes and healthcare looming over businesses. Those words fell on deaf Democratic ears who were more interested in inquiring of Dr Hall why unemployment of young blacks were much higher than that of other races.

Obama is a one-term president.

Oct 03 12:17 AM

[Moon Kil Woong:]

All are very correct. The technical end of a recession has nothing to do with a recovery. This holds especially true when it comes on the back of short term government spending and inflationary actions by the Fed. Monetary expansion is pretty easy to do when you are willing to devalue your currency 10-15% in the span of less than 1 year. Such expansion has little to do with people doing well or even better.

Oct 03 10:58 AM

[Uttam:]

The most popular articles as I see now on SA are:
Most Popular
Ten Reasons for an Imminent Stock Market Crash
The Next Major Crisis Brewing
Wall Street Breakfast: Must-Know News
Recession Is Over; Depression Has Just Begun
7 Dividend Stocks Increasing Cash Payouts
Friday Outlook: Fear Strikes Back
Tallying the Damage in Solar Stocks and Sifting for Opportunity
No Chance of a 'V' Recovery
Banking Sector: Worst Is Yet to Come
CIT's Failure Could Threaten Financial Sector's Overall Recovery

These are diametrically opposite to the myths just pointed out. So, where are the myths?

Oct 03 01:46 PM

[bbro:]

Love it keep ir up the doom and gloom...markets always climb a wall of
worry.....

Oct 03 01:53 PM

[HLEASON:]

Obama is an egotistical con artist. The pols, Dem & Rep
are sheep. The current path is 180 degrees out.
Grant a 5 yr capgain exemption to new small busness and watch employment and tax rev rise. What's wrong with this?

Oct 03 03:03 PM

[Jeff Nielson:]

Uttam, if you're looking for economic "myths" (by the truckload) just go to Bloomberg, or CNN, or Reuters, or the two U.S. right-wing "entertainment channels" which masquerade as "news" (Fox "News", and CNBC).

What you will see there are ONE HUNDRED bullish, B.S. articles for every ONE piece which appears on Seeking Alpha (or elsewhere) which attempts to expose this propaganda - and don't forget the legion of market-pumpers whose work also appears at Seeking Alpha.

The only fault I can find with the author's piece is that he was much too deferential to the government and other propagandists.

The REAL U.S. economy is so much worse than the fantasy presented by the media that even this author is still much too optimistic.


On Oct 03 01:46 PM Uttam wrote:

> The most popular articles as I see now on SA are:
> Most Popular
> Ten Reasons for an Imminent Stock Market Crash
> The Next Major Crisis Brewing
> Wall Street Breakfast: Must-Know News
> Recession Is Over; Depression Has Just Begun
> 7 Dividend Stocks Increasing Cash Payouts
> Friday Outlook: Fear Strikes Back
> Tallying the Damage in Solar Stocks and Sifting for Opportunity<br/>No
> Chance of a 'V' Recovery
> Banking Sector: Worst Is Yet to Come
> CIT's Failure Could Threaten Financial Sector's Overall Recovery
>
>
> These are diametrically opposite to the myths just pointed out. So,
> where are the myths?

Oct 03 03:16 PM

[jimboy:]

Recessions are horrible but usually achieve things - leaner industry, government belt-tightening, debts repaid or forgiven, export booms, re-skilling - an endless list of good things potentially. You can tell this recovery is fake because the recession has produced very little of value apart from a bit of consumer retrenchment and a narrowing of the trade deficit.

The authorities have been attacking fundamental problems with ephemeral solutions - it's like watching a housewife trying to mask the smell of rodent decomposing behind the refrigerator with air freshener.

I disagree with the long, slow recovery thesis - the US doesn't have time for that because of the fiscal mess. The reflation either has to work or it's doomsday. My humble article here sees Argentina - not Japan - as the model and pencils in the collapse for 2011.

hubpages.com/hub/Peak-...

Sorry for the long post - I've been getting a bit emotional about it all recently.

Oct 03 03:48 PM

[Analyste de...:]

"More laid-off workers will exhaust their unemployment benefits, forcing more drastic lifestyle cutbacks than they've made already. That will force deeper cutbacks in consumer spending and PROLONG a recovery."

Prolong? I've seen other articles misusing this word. I'm not sure why, and it's not pedantic to expect authors to avoid these kinds of confusing errors.

"PROLONG the recession" or "DELAY a recovery," right?

Oct 03 04:51 PM

[Bill S. Friend:]

Most people are not aware of the peril our economy is in. This is life altering stuff we are talking about. The gains in the stock market have been artificially incentivised, and after the drop in the dollar or, more importantly, the rise in precious metals these gains are anemic or non-existent.
Most people are going to have major culture shock, when trying to survive the New Economy.

Oct 03 10:01 PM

[E Nuff Sed:]

Interesting chart from chart of the day.
www.chartoftheday.com/...

Oct 03 10:12 PM

[sethmcs:]

Crisis and recessions are full of opportunity unless you have already mortgaged the future.

So I say: What me worry?

Oct 04 02:01 AM

[enigmaman:]

Yes interesting in that it indicates we are in uncharted territory as far as % off average, but what does that tell us about our recovery, will it be jobless because employment numbers stayed below ave going into this recession, so we showed up for this recession in worse shape ( jobs) then we did in others, this being the worst we have experienced could mean we are in for a real doosey of an anemic recovery, whats your take? To me with jobless recovery I envision a hamster on running wheel, exerting plenty of energy but getting nowhere fast, my take is dead money in most stocks and real estate better for " have to have to live" necessities stocks


On Oct 03 10:12 PM E Nuff Sed wrote:

> Interesting chart from chart of the day.
> www.chartoftheday.com/...

Oct 04 08:33 AM

[jimmy46:]

says economist Gary Shilling""""""
Shilling writes for Forbes mag.
He's been predicting a depression for the last 30 years,

A broken clock is right twice a day,
Shilling is right once every 30 years!

Oct 05 04:29 PM