'Absolutely' the stimulus is working, Romer says

Is the stimulus working? Given that economists still argue about the effects of FDR’s New Deal, it will probably be years before they reach any conclusions about the value of President Obama’s $787 billion recovery package.

But that hasn’t stopped administration officials from declaring victory. On Thursday, Christina Romer, chairman of the president’s Council of Economic Advisers, gave one of the most detailed White House defenses of the stimulus to date.

“Absolutely” the stimulus is working, said Ms. Romer.

“The Recovery Act ... is helping to slow the decline, and change the trajectory of the economy,” she added.

What’s her evidence? One of her main points is that the US has experienced an historically unusual deceleration in the fall of its GDP.

Think of the US economy as a skydiver plummeting to the ground in free-fall. In the fourth quarter of last year, GDP shrank 5.4 percent. In the first quarter of this year, it contracted another 6.4 percent.

Then it pulled the ripcord, in the administration’s view, via passage of the president’s stimulus package. With a jolt, the parachute (perhaps composed of billions of dollar bills sewn together) deployed, and the descent slowed.

In the second quarter of this year, GDP shrank only one percent. That sudden change in the economy’s speed of falling, from 6.4 to one percent, was the largest such swing in GDP numbers in almost a decade, and the second largest in 25 years, Romer told the Economic Club of Washington D.C.

If the bill hadn't passed, the decline in second quarter GDP would have been 3.3 percent, instead of 1 percent, according to her calculations.

Moreover, using baseline economic projections from earlier in the year, the stimulus package has saved or created 485,000 jobs, although unemployment continues to grow, Romer said.

“In other words, after we administered the medicine, an economy that was in free fall has stabilized substantially, and now looks as though it could begin to recover in the second half of the year,” Romer said.

But here’s where the skydiver analogy is no longer applicable. Somebody with a parachute usually floats gently to earth. Yet economic recovery will not happen until the economy begins expanding again – until, in essence, the parachute starts floating back up.

“Most forecasters are now predicting that GDP growth is likely to turn positive by the end of the year,” Romer noted. But, she added, there is “substantial uncertainty” to this forecast.

On that point, Romer is undeniably correct. Nobody can be certain where the economy is now headed.

But that does not mean economists aren’t trying to figure it out. An Aug. 5 Morgan Stanley forecast holds that “the deepest and longest post-war recession is now ending.”

Stronger-than-expected vehicle production may drive the economy to a 3 to 4 percent positive growth pace in the third quarter of this year, according to Morgan Stanley.

But continued weakness in the service sector and bad news on employment figures show that any path to recovery will not be smooth, according to a new IHS Global Insight analysis.

These continued signs of frailty “should quell any incipient notions of a rapid break-out in economic activity in the second half of 2009,” according to IHS.

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