Recession retreats, hard times don’t
Struggling business owners and millions of unemployed Americans may not believe it, but the government is expected to report today that the U.S. economy turned a corner and resumed growth in the third quarter in what would mark the end to the worst recession since World War II.
Forecasters say the economy probably expanded at an annual rate of about 3% in the three months ended Sept. 30, a solid performance driven largely by the federal stimulus package and improved business spending. The growth -- coming after four straight quarters of contraction -- is the evidence most economists say is needed to declare victory against the recession.
“We’re on the start of a recovery track and one that is sustainable,” said Lynn Reaser, an economist and president of the National Assn. for Business Economics.
But even if the new gross domestic product numbers are in the expected range, it would not be the breakthrough turnaround needed to reverse the dramatic 6% decline in GDP last fall and winter. It’s also unlikely to spur significant new hiring. A number of forecasters are predicting weaker expansion in the fourth quarter and in the early part of 2010.
Not until the middle of next year, at the earliest, is the U.S. economy expected to gather enough momentum to put a meaningful dent in the nation’s high unemployment rate.
Adding to the skepticism about what the uptick in growth will mean was a Commerce Department report Wednesday showing that new-home sales dropped unexpectedly in September. The report prompted Goldman Sachs to downgrade its expectations for the third-quarter GDP growth rate from 3% to 2.7%.
A revival in the depressed home-building industry was seen as a positive for the economy in the third quarter -- the first since late 2005. The housing market has been boosted by the federal government’s $8,000 tax credit for first-time home buyers, a program that is scheduled to expire at the end of November. Although Congress is considering an extension of the tax credit, the housing market’s rebound remains fragile.
“The conviction that the recovery is going to be strong enough is just not there,” said Ross DeVol, director of regional economics at the Milken Institute think tank.
When the recession began, he said, businesses made giant cuts to their payrolls, anticipating that the slowdown would mirror the Great Depression. That led productivity -- or output divided by work hours -- to surge 6.4% from April through June of this year, the largest gain in almost six years. In previous recessions, productivity has tended to fall.
Now, even though employers realize that the economy isn’t quite as bad as they had anticipated, DeVol said, they aren’t ready to believe that a recovery has begun.
Jim Shanman is a case in point. His Los Angeles graphic design and marketing studio, Asylum, is experiencing the biggest slump he’s seen in 24 years, and he laid off two employees since business slowed late last year.
As a result, Shanman says, he is “wearing 17 hats instead of the usual 10, but you have to do what you have to do in tough times.” He has no full-time employees and depends on freelancers to do work he can’t complete himself.
Shanman is starting to see some signs of recovery: A bank client has agreed to go forward on a project it wouldn’t have considered six months ago, and new clients seem more eager to commit to contracts.
Yet he has no plans to hire new employees until mid-2010 at the earliest.
“We need to get back to where we’re profitable and we know that we can maintain it over a certain period of time,” Shanman said.
Economist Reaser is more upbeat about the employment picture. She notes that the economy grew in the third quarter even as total work hours fell 4.8% during that period at an annual rate. If GDP expanded at a 3% annual pace as expected, she said, that would mean productivity gains were approaching 8% at an annual rate, which is unsustainable.
Reaser believes that many businesses are at a turning point, at which they must soon add hours and workers to produce more and capture sales in a growing domestic and global economy.
“The unemployment rate is always a lagging indicator, and it will take some time,” she said.
Not everyone would agree. Peter Morici, a professor at the University of Maryland and former chief economist at the U.S. International Trade Commission, says that the economy needs to have annual growth rate of 3% or more over at least three quarters to add enough jobs to bring down unemployment.
“I don’t see a rosy picture,” he said.
Sluggish hiring and persistent high unemployment will weigh down consumer spending, which accounts for about 70% of the nation’s GDP.
Private spending was down in the second quarter, when GDP declined at a 0.7% annual pace. But that probably turned around in the third quarter, thanks partly to the $787-billion stimulus package, which has put more money into consumers’ pockets through reductions in payroll taxes, unemployment checks and other programs.
Most of the stimulus money will have been spent by next summer, and many economists worry that without federal government support, the recovery will weaken. White House officials, under pressure to extend some programs despite concerns about soaring budget deficits, are hoping that private businesses will grab the recovery baton from government and run with it.
A recent survey by the Conference Board indicates that chief executives’ confidence in the economy has improved significantly from the second quarter, a sign that companies may be gearing up to boost spending for equipment such as computers and software, said Bart van Ark, chief economist at the New York research group.
Even so, after the initial boost to rebuild inventory following the recession, Van Ark doesn’t see much to propel growth. Consumers are mired in debt, and credit remains tight.
“It’s going to be a very slow recovery,” he said.
Although people commonly define a recession as two or more straight quarters of GDP decline, economists rely on the National Bureau of Economic Research, a private, nonpartisan research group, to mark the beginning and end of business cycles. The bureau considers GDP and employment data the main factors in determining a recession’s length. The bureau said the latest recession began in December 2007, and economists say it will most likely declare that the downturn ended sometime in the third quarter.
Casey Mulligan, a University of Chicago economics professor, says that what’s different about this recession is that GDP fell less than employment, suggesting that there are problems in the labor market beyond simply consumer spending and the broader economy -- and the crucial role of government policies in addressing the employment problems.
He contends, for example, that repeated increases in the federal minimum wage contributed to the surge in teenage unemployment during the recession.
“If you have a double dip in bad policy, you’re going to have a double dip in employment too,” Mulligan said. “That’s really the wild card.”
Although California has lagged behind the nation in recovering from past recessions because of sluggishness in defense, aerospace and Internet companies, economists say it could actually lead the country this time around.
Next year will be sluggish because of state budget issues, said Jerry Nicklesburg of the UCLA Anderson Forecast, but he predicts that California will outperform the nation in 2011 and 2012.
“We’re going to start off a little slower and then move faster than the U.S.,” Nicklesburg said.
Stimulus money in energy and technology will flow to California as well, said Stephen Levy, director of the Center for Continuing Study of the California Economy. The state’s strength in exports, entertainment and technology will help it outpace the nation as the recovery begins, he said.
Global Capital Law Group, a boutique law firm in Los Angeles, was careful not to spend too much money when it upgraded its computer equipment this spring. The company bought inexpensive netbooks and is using open-source software, rather than shelling out thousands apiece on new computers, managing partner James C. Roberts III said.
The firm often uses independent contractors when working with clients, a practice that has become much more integral to its practice in the last two years, he said.
Roberts said the firm planned to hire a new employee in early 2010 to add to its staff of six, but he “didn’t see the demand for it right now.”
Until then, the firm will increase the number of independent contractors it is using as business starts to grow again.
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alana.semuels@latimes.com
