Why the Economic Recovery Won't Feel Like One

"Less bad" is still bad.

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The recession is dividing America into economists, and everybody else.

The economists are the ones probing for "green shoots" (the most overused cliché of 2009) in all those economic reports that make the headlines. For the most part, what they're seeing is bad news that's less bad than it was a few months ago. An economic recovery has to start somewhere, and before things start to get better, they have to stop getting worse. The data watchers are getting excited because many of the indicators that were collapsing not long ago—like home sales, credit availability, consumer spending, and overall economic growth—aren't collapsing anymore. They're just...declining.

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This might be the precursor to good news, but it isn't good news. The news is still bad. Yet we're so eager to believe that the Great Recession is ending that we're on the verge of becoming overly optimistic. Consumer confidence has surged for a couple of months in a row, for example, partly because of the rebound in the stock market. The foundation for any kind of confidence in the economy is flimsy, however, and if much more goes wrong, whiplashed consumers might end up gloomier than before. "The market might not just be looking for green shoots," says Pat O'Hare, an analyst at briefing.com, "but might also be starting to smoke them."

Everybody's tired of doomsayers pointing out how much worse the economy could get, so let's just focus on two factors: housing and jobs. Most people agree that plunging home values need to stabilize before there's any kind of economic recovery. And jobs have to return. Until they do, mortgage and other loan defaults will continue to rise as millions of unemployed borrowers come up short paying their bills. Consumers who are still employed but are worried about their jobs will continue to hoard money, depressing the market for homes, cars, and many other products.

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Home prices have fallen about 30 percent nationwide since they peaked in 2006. Isn't that enough? Surely they have to stop falling soon, right? Maybe not. The Federal Reserve has projected a total home price decline of somewhere between 41 and 48 percent, with a bottom in 2010. After that, the "rebound" is likely to be muted, with slow price gains at best. Yale economist Robert Shiller, a Yale economist who is the éminence grise of bubbles and busts, pointed out recently in the New York Times that after the mild recession that ended in 1991, it took six years for home prices to start rising again. And this recession is far worse.

Housing matters for several reasons. When the economy is healthy, housing and everything associated with it accounts for about 20 percent of economic activity. If the housing market is in the dumps, odds are that the economy will be, too. In past recessions, a housing rebound has often led the way to better times; without it, the economy's engine is a lot weaker. The plunge in home values has also wiped out a big chunk of Americans' net worth, with no sign that it will be replaced. We feel poorer, and in fact we are. If you're one of the millions whose home equity has plunged, you're not likely to be a big spender who helps get a recovery rolling.

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Jobs are just as important as housing, and the formula for a recovery doesn't add up there, either. Most economists predict that the unemployment rate will keep rising through 2009 and into 2010, topping out somewhere between 10 and 12 percent. It will be genuine good news once the unemployment rate starts to fall, but we'll still be trudging through a few years of scarce jobs. The Congressional Budget Office, for instance, predicts that the unemployment rate will drift down slowly and won't return to "normal" levels of 5 percent or less until 2016.

Meanwhile, in the short term, unemployment is already worse than in some important forecasts. The unemployment rate hit 9.4 percent in May, and for all of 2009 so far, the average is 8.5 percent. That's higher than the Obama administration's 8.1 percent estimate for 2009, which means the huge, projected $1.8 trillion deficit—which depends upon how much income-tax revenue the government takes in and how much aid and assistance it gives out—could end up considerably higher. Unemployment is also worse than the "baseline rate" the Federal Reserve used when it conducted its "stress tests" of 19 big banks, which means the Fed may have overstated the health of the nation's banks. But we're straying into that longish list of things that could still go wrong....

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So where will this incipient recovery come from? Not from a boost in household wealth or a surge of new jobs or spendthrift consumers borrowing their way to happiness. If we're going to have the usual kind of recovery—where jobs generate income that consumers spend—then it's still winter, and the ground has yet to thaw. But at least the economists are sticking their shovels into the dirt.