Perception vs. Reality: Is the Current Economic Recovery Fact or Fiction?

Joel Anderson |

There's an old joke about three economists who go hunting. They come across a deer and the first economist takes a shot and misses the deer by three feet to the the left. The second economist takes a shot and misses by three feet to the right. The third economist then starts running towards the deer shouting, "We got him!"

Anyone following the economic news over the last few months is most likely experiencing something similar. Today, Federal Reserve Bank of New York President William C. Dudley said that the economic growth that spurred excitement at the end of last year might not be sustained.

"It is unlikely that the faster growth experienced in the fourth quarter of 2011 will be matched in the first half of 2012," Dudley said today in remarks in New York. "In addition to the temporary nature of some of the recent improvement, there are significant impediments to a robust recovery."

So, now who's going to buy all these, "I survived the housing crash of 2008 and subsequent economic downturn and I all got was this lousy T-shirt" T-shirts then? In reality, the economy is an incredibly broad, complicated mechanism so it's not surprising that there are differing opinions about it. However, what should Americans believe about the current economy? Is Dudley right that the outlook is still dreary? Or were the more glowing reviews from December on the money (so to speak)?

GDP Growth Up at End of 2011

Data on the Gross Domestic Product released today showed that the final quarter of 2011 had GDP growth at an annual rate of 2.8 percent. While this represents a significant improvement over the last year and a half, it's still much slower than most economists believe it needs to be to return to full employment in the near future and below expectations of 3 percent growth. Should the economy maintain GDP growth of 3 percent a year, economists believe that it would take until 2020 for to return to full employment. What's more, the pickup may be artificial according to some.

"Overall, the pickup in growth doesn't look half as good when you realize that most of it was due to inventory accumulation," said Paul Ashworth, an economist at Capital Economics.

It's All About Jobs

News yesterday that first-time unemployment claims had ticked up last week to a seasonally adjusted 377,000. While this represents an increase of some 21,000, it's also still close to the 375,000 figure that many economists have identified as being necessary for a sustained recovery.

“While the weekly claims number jumped, that was due to an artificially low number the previous week,” said Joel Naroff of Naroff Economic Advisors.

With unemployment showing a steady decline at the end of 2011, many economists had hoped that the long, slow return to prosperity was beginning.  Others, though, continued to caution that the numbers were affected by the millions of Americans who had stopped looking for work entirely and dropped out of the labor market as a result. However...

Actually, It's All About Housing

It was housing that started this whole mess, and it's entirely possible that housing is what will have to turn it around in the end. Yesterday also brought news that new home sales had declined 2.2 percent to an annual rate of 307,000. Once again, this comes after news at the end of 2011 that home sales were improving. However, the market continues to be deeply affected by the oversupply of cheap homes leftover from the housing bubble.

“Builders continue to contend with a number of existing homes that are deeply discounted,” said Anika Khan, an economist at Wells Fargo Securities LLC. “We’re expecting a bit of a pickup in 2012, but we won’t see a meaningful increase as long as new homes are competing with those existing homes.”

2012 Looking Up?

While finding consensus among economists is impossible, there seem to be an increasing number of voices predicting that the economic gains in the second half of 2011 will slow early in 2012. Dudley said as much in his speech, citing the housing market (“The ongoing weakness in housing makes achieving a vigorous economic recovery more difficult for several reasons”) and the people dropping out of the labor market ("[An] outright decline of the labor force [means the] decline in the unemployment rate may overstate the improvement in labor market conditions.”).

Dudley, speaking soon after yesterday's announcement by the Federal Reserve that interest rates will remain low through 2014, also pointed out that the Fed alone couldn't be expected to pull the nation out of trouble.

“Monetary policy has done and will continue to do its part in supporting the recovery -- but it is not all-powerful,” Dudley said. “Other complementary policy actions in housing, fiscal policy and structural adjustment or re-balancing of the economy will be essential if we are to achieve the best available recovery."

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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