President Obama kindled the expectations of many Americans Friday when he declared he saw "glimmers of hope across the economy.”
But even with some recent signs – a resurgent stock market, for one – suggesting that the pace of economic decline is slowing, many economists still look forward with caution. Despite the good news, they say, there is a long way to go for the US economy.
The reason lies in the nature of this downturn: It is global in scope, and it is rooted in a mammoth erosion of net worth for households and big investors alike. This makes a rapid and vigorous rebound very difficult.
“The best one can say is the rate of decline is slowing,” says Rajeev Dhawan, director of the forecasting center at Georgia State University in Atlanta. “Job losses, unemployment claims, foreclosures – they’re still rising."
Mr. Obama himself was careful not to raise expectations too high in his statements Friday. "The economy is still under severe stress, and obviously during these holidays, we have to keep in mind that whatever we do ultimately has to translate into economic growth and jobs and rising incomes for the American people," he said.
But the stock market rebound – with US share prices rising 25 percent in little more than a month – suggests that some fears are ebbing, particularly concerning the vital banking sector. This confidence could be an important precursor of recovery, but it should not be mistaken for the recovery itself, Mr. Dhawan says.
Many economic forecasts these days include a gap between an end of official recession – perhaps during the second half of 2009 – and the start of a truly strong recovery in 2010 or later.
"People are assuming that growth is automatic," Dhawan says. "There are a lot of 'ifs' before that [revival of growth].”
The biggest "if" is the financial sector, which provides the economy’s fuel of credit. Banks are working through big write-offs of bad loans, and a home-mortgage bust is now being followed by problems in other areas such as commercial real estate.
Fixing the financial system was a focus for Obama Friday, and after a morning meeting with economic officials he offered his public comments.
Infusing so much money into the financial system was helping some lenders to feel more secure – and to give out more loans, he said: “We feel very good about the progress that we're making in unlocking lending in some particular markets, for example the small-business area.”
He also expressed confidence about a Treasury plan to handle so-called toxic assets – the bad mortgages and other loans that remain on banks' books and are gumming up the lending process – by setting up a public-private investment fund to buy them.
And he said that American workers are starting to see tax reductions show up on their paychecks, thanks to the stimulus legislation enacted in February.
These were among the hopeful signs he alluded to, along with a surge in consumers who have more free cash as they refinance their home loans at a lower interest rate.
The administration is banking on an optimistic forecast for the economy. After a 1.2 percent decline in gross domestic product (GDP) this year, the Obama budget office predicts 3.2 percent growth in 2010, popping to 4 percent in 2011.
That would be a very good outcome for ordinary Americans as well as the White House. Obama needs increased tax revenues and more jobs to cut budget deficits in half by 2013.
Later Friday, the Treasury Department reported that financial rescue efforts had pushed the federal deficit to nearly $1 trillion in just the first six months of the current fiscal year.
Many forecasts peg GDP to grow at a slower pace than predicted by the administration.
The International Monetary Fund recently projected 1.6 percent growth for the US in 2010. Another multinational body, the Organization for Economic Cooperation and Development, sees no growth at all.
Behind the deep downturn lie many factors, but one of the biggest is a broad erosion of wealth globally. The downturn in real estate, stock markets, and commodity prices has affected consumers, investors, and employers worldwide.
In stock market values, the fall in equity prices has drained about 55 percent of global GDP, or $30 trillion, according to a recent research report by Goldman Sachs. In residential real estate values, the downturn has siphoned off 20 percent of global GDP, or about $11 trillion, the report finds.
It suggests that the world economy has a big hill to climb. But many economists share the hope that policies now taking effect will build the foundation for a recovery.
Japan announced an expanded stimulus plan Friday, for example. In the US, tax credits for first-time home buyers are helping to revive demand in the housing market. Obama said many current homeowners can now reap savings of $1,600 to $2,000 a year by refinancing their home loans.