Several recent surveys suggest a majority of the American public believes we are still in recession. Although the statistical evidence indicates the economy emerged from recession beginning in July 2009, many people likely haven”™t felt much benefit from this recovery.
Unfortunately, too, we have now passed through the time frame when we normally see the best growth as the economy emerges from recession. The fact that so many people have not felt the benefits testifies to the extent that this recovery has lagged the economic growth of the average post-World War II recovery.
The pessimistic survey numbers also point to a significant vulnerability for the economy as we look at the last months of 2010: the question of how low levels of consumer and business confidence might affect economic growth.
Concerns about health care, taxes
During the early months of this recovery, consumer spending contributed to only about half the economic growth that it has in past recoveries. That reflects not only persistently low levels of consumer sentiment, but also slow income growth and the fact that consumers already spend a high proportion of their earnings. Moreover, the public is concerned about rising health care costs, continued high levels of unemployment and the expectation that exploding government deficits and debt levels will cause future problems.
In short, even if consumers had the confidence to spend, until income growth improves, they probably will not contribute as significantly to economic growth as in the past.
Corporate profits are up, and cash on balance sheets is at high levels, yet businesses have not been spending. Surveys of small-business owners suggest they worry about low sales levels. As we enter the part of the economic cycle where growth naturally decelerates, that worry may intensify.
The consistent second worry in surveys of business owners is uncertainty about tax rates and the costs of government policies. It seems clear that taxes must rise, and many businesses believe they may be asked to shoulder a significant part of that load. The new health care bill and other new regulations could also mean higher costs for businesses. Under these circumstances, we expect companies to remain very cautious about business expansions.
Positive signs, but still some fears
There are some bright spots in the outlook. Exports, especially to the emerging markets of the world, have helped generate U.S. growth over the last year.
Through the waning months of this year, the slowing rate of growth in China and economies dependent upon China, will affect U.S. economic growth. Yet over the longer term, the Chinese economy should reaccelerate.
The fiscal austerity needed in many industrialized countries may restrain global economic growth, but the developing economies should provide a strong foundation for continuing economic growth in the U.S. and other industrialized countries.
Certainly, this economic recovery has not been strong and we anticipate it will remain anemic. Nonetheless, gross domestic product statistics show the economy has grown over the last year. We think the economy will continue to grow in the final quarter of this year and in the early quarters of next year.
While the risks of renewed economic contraction have increased, those risks have not risen to levels that normally indicate a looming recession. Even if the economy contracted for two successive quarters, which would officially qualify as a “double-dip” recession, we think any return to recession would be both very brief and relatively shallow.
The greatest risk to the domestic outlook may be lack of confidence. If consumers and businesses panic and cut spending, an economic downturn could become a self-fulfilling prophecy. Consequently, as we monitor changes in the economic statistics, we will also need to monitor public reaction to that news.
In 1933, Franklin Roosevelt said, “The only thing we have to fear is fear itself ”“ nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
While that quote understated the legitimate, economic problems of that period, it reflects the realization that economies can work through even serious problems ”“ as long as the public retains the confidence to do what is needed. Up to this point, both consumer and business confidence have been subdued, but they have remained high enough to spend enough to allow the economy to grow.
As long as those groups retain their nerve, the U.S. economy should continue to grow modestly as we work through the problems that led to the “Great Recession.” And while the U.S. economy admittedly faces large challenges, we can also draw reassurance from the fact that even the Great Depression eventually yielded to renewed growth.
Mary Cologero is a portfolio manager of Key Private Bank in the Hudson Valley/metro New York district. Reach her at mary_cologero@key.com.
