Gun shy about recovery

It's not a question of whether the economy is getting better - there's no doubt about that, whether you're looking at retail sales, corporate earnings, stock prices, home sales, or the fact that your next-door neighbor will be vacationing in Europe this summer. The bigger question is whether growth will get beyond the current okay-but-not-great levels, and if it doesn't, whether the economy will stall out and lead to another recession. The dreaded double-dip. Conventional wisdom, as laid out this morning by Fed Chairman Ben Bernanke, would suggest a moderate recovery. But there are strong minority views on either side of that middling position. Some insist that the recovery will be far stronger than expected (Daniel Gross' Newsweek cover is headlined "You're Awesome, America!"), while others insist that too many problems are looming: the phasing out of the federal stimulus, the prospect of many more foreclosures, and the overhang of long-term unemployment.

As if to underscore the point, the North County Times reports that Bank of America is ramping up its foreclosure activity in San Diego County. "There have always been Wall Street economists wanting to cheerlead the recovery, and quick to jump on any piece of news showing a great boom is around the corner," Harvard economist Kenneth Rogoff told the Washington Post. "The data so far are more consistent with a very moderate recovery." Here's a key point from the Post story:

American households are trying to reduce debt to stabilize finances. But they are doing so slowly, with total household debt at 94 percent of gross domestic product in the fourth quarter down just slightly from 96 percent when the recession began in late 2007. By contrast, that ratio of household debt to economic output was 70 percent in 2000. To get back to that level, Americans would need to pay down $3.4 trillion in debt -- and if they do, that money wouldn't be available to spend on goods and services. No one knows where household debt levels will settle, but assuming that they are lower than the ultra-leveraged 2005-2008 period, getting Americans' balance sheets in line will be a drag on economic activity.

But NYT columnist Floyd Norris, who believes that the recovery is gaining strength, suspects another factor behind the bearishness of some economists: That so many of them did not see the recession coming - certainly not one of this magnitude - and are thus gun shy about forecasting a strong recovery.

Remember Ben Bernanke assuring us the subprime problem was "contained"? In mid-2008, after the recession had been under way for six months, the Fed thought there would be no recession, and the most pessimistic member of its Open Market Committee thought the unemployment rate could climb to 6.1 percent by late 2009. It actually went over 10 percent.

But don't just cite Bernanke. Everybody is mixed up, including investors. A Bloomberg poll found that only 3 of 10 respondents say that the value of their portfolio has risen since a year ago, which, given the market gains, is next to impossible. Yet they still feel that way, which illustrates the timidity out there. For the recovery to really take hold, those perceptions will need to improve - and that can only happen if they're bolstered by consistent growth.