In many ways, it has been a remarkable political achievement: In one short month, President Obama has pushed a huge stimulus package through Congress, started on his version of a bank system bailout, and announced an ambitious plan to help struggling homeowners avoid foreclosure. All three prongs of his strategy for economic recovery are moving into place.
But the reaction hasn’t exactly been euphoria on Wall Street – or Main Street, for that matter. Over the past four weeks, world stock markets have slumped, the Dow index has hit a six-year low, and there’s no sign that US consumers are reopening their wallets and showering desperate retailers with dollars.
This muted response may simply reflect the fact that recovery will take time, and the downturn is deeper than many economists predicted. Or it may be due, in part, to worry that the pieces of Mr. Obama’s strategy may not work together as advertised.
And part of it may be fear.
Things have been so bad for so long now, that all many Americans may be able to see is the tunnel.
“There’s a tendency when the economy is sinking to ask the question ... ‘when will it ever end?’” said Michael Mussa, senior fellow at the Peterson Institute for International Economics, in a Feb. 17 analysis of US economic prospects.
Slumps end, too
But recessions do end, said Mr. Mussa, even bad ones. This one will, too.
“Once the negative forces that are pounding down the economy abate, there is a natural tendency of the economy to recover,” he said.
Meanwhile, new economic statistics continue to be gloomy. The Labor Department reported on Feb. 19 that the number of laid-off workers receiving regular unemployment benefits jumped to 4.99 million, an all-time high.
By way of contrast, the corresponding figure from a year ago was 2.77 million.
Wholesale inflation also took an unexpected and unwelcome upward jolt. It jumped 0.8 percent last month, the biggest such gain since July, led by a 3.7 percent increase in energy prices.
Rising job worries
According to a new Associated Press poll, Americans are becoming more concerned about losing jobs.
Nearly half of poll respondents, 47 percent, said that they worry at least somewhat about losing their employment.
The poll also found support for Obama’s stimulus plan declining somewhat. Fifty-two percent of respondents approved of the plan, down from 55 percent in January.
Obama administration officials admit that their economic strategy isn’t going to turn the economy around on a dime, and that unemployment could drift higher, perhaps into double digits.
Better than nothing
But things would be far worse, absent their three-pronged strategy, argue administration officials. The banking rescue will provide the context for the stimulus to begin to work, they say. Keeping people in their homes via foreclosure relief will prevent the business cycle from continuing to accelerate downwards.
“If you’re moving with as much creativity and careful design force as you can, each will be more effective moving together,” said Secretary of the Treasury Timothy Geithner of the strategy’s three aspects at a Feb. 18 briefing on the mortgage plan.
Wall Street, for its part, has worried most about what it sees as the vagueness of the financial rescue effort.
“The key to whether or not [the Obama administration’s ] policies get traction lies in breaking the vicious circle between the credit crunch and the economy,” wrote Morgan Stanley economist Richard Berner in a Feb. 19 analysis.
Until questions are answered about how, exactly, the administration plans to buy up the so-called “toxic assets” of banks that are now clogging the system, and what price they intend to pay for them, even aggressive policy might just spin its wheels, according to Mr. Berner.
Overall, Morgan Stanley sees the US economy returning to positive growth late in 2009, and a moderate, sustainable recovery taking hold in 2010.
“Investors should not rule out the chance that policy initiatives will quickly come together and promote a traditional, vigorous rebound,” writes Berner.
Fed trims outlook
Others aren’t so sanguine. The Federal Reserve sharply reduced its predictions for economic activity this year on Feb. 18.
Overall, the economy will contract between 0.5 and 1.3 percent in 2009, according to the new Fed numbers. Last fall, the Fed forecast a range of 0.2 percent decline, to 1.3 percent expansion.
Economic recovery could begin later this year, but continued strain will mean that it’s dampened into 2010, Fed officials concluded at their policy meeting in late January.
The US might not return to full employment, measured by an unemployment rate of 5 percent, until 2012, said the Fed.
“In examples that resonate with me, personally, the unemployment rate in the small town in South Carolina where I grew up has risen to 14 percent, and I learned the other day that what had once been my family home was recently put through foreclosure,” said Fed chief Ben Bernanke at a Feb. 18 appearance before the National Press Club.