Surprise. That economic recovery we keep hearing about seems to be playing hide-and-seek.
Federal Reserve Chairman Ben Bernanke and others have said that, technically speaking, the recession is over. The stock market has been charging forward, with a 58 percent gain between the lows of March and a September peak. But companies keep cutting jobs, with the unemployment rate creeping up to 9.8 percent in September. It would already have hit 10 percent if not for discouraged workers who lost their jobs months ago and have stopped looking for work. Meanwhile, a lot of things could still go wrong, even if we pretend otherwise. Here are some of the misconceptions about the economic recovery:
The pain will subside. Sooner or later it will, but the pain could actually intensify over the next several months. That's because unemployment is expected to get worse until early or mid-2010. More laid-off workers will exhaust their unemployment benefits, forcing more drastic lifestyle cutbacks than they've made already. That will force deeper cutbacks in consumer spending and prolong a recovery. "The recession is technically over, but that means we're at the moment of maximum pain," says Dirk van Dijk of Zacks Equity Research. "If you're tumbling down a cliff, it hurts the most once you're lying at the bottom."
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A recovery will be consistent and quick. We seemed to plunge into recession with reckless abandon, so it would be nice to think that once we've bounced off the bottom, we'll climb right back out. But that's not how recessions typically end. "Recessions are stop-and-go affairs," says economist Gary Shilling. "Seven of the last eight recessions have had at least one positive quarter before the recession picked up again." Instead of a pronounced recovery, it's more likely we'll muddle along for months, maybe even years.
There won't be another recession. Sure, economic growth is probably positive right now, which would technically indicate that the recession is over. But that doesn't guarantee that the economy will keep growing. A bust in commercial real estate is still in the beginning stages and could persist for a couple of years. Bank losses on mortgages and consumer loans are getting worse, not better. And few, if any, parts of the economy are strong enough to propel a robust recovery. Moody's Economy.com says the odds of a double-dip recession—another six months or more of declining economic activity—are 29 percent. That's lower than earlier this year, but not low enough.
Consumers are regaining confidence. Yes, confidence measures have improved over the past several months. But consumer confidence is very fickle and closely related to the job market, which is getting worse. The stock market rally has helped restore some lost wealth and generated hopeful headlines, but it could turn around and bring confidence down with it. Instead of an uninterrupted improvement, consumer confidence will probably drift upward over time in fits and starts, mirroring the sputtering economy itself.
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Things will get back to normal before long. Don't count on it. Odds are that the Great Recession will force lasting changes in our quality of life. The twin miseries of a housing bust and stock market correction have wiped out an astounding $14 trillion in Americans' net worth, and that money isn't coming back soon. It could be 10 to 20 years before housing values have regained the peaks of 2006, and talk about a new bull market for stocks could be as hollow as those old predictions about the Dow hitting 20,000 or 30,000. And millions of consumers are simply tapped out, with too much debt and far too little savings for retirement or emergencies. If a miraculous recovery suddenly materializes, we'll all celebrate. But it's more likely that all these economic wounds will heal slowly, and leave scars.