6 Things Missing From the Recovery

A Great Recession ought to produce a Great Recovery. Here's why it's not happening

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Go ahead, feel a little more optimistic. Just keep some healthy skepticism nearby.

After two grueling years, the economy is clearly growing again. Shoppers are getting more comfortable spending money. Mass layoffs have abated. A few companies are actually hiring.

[See why a rising unemployment rate is good news.]

But this is also a peculiar recovery that so far seems surprisingly—perhaps alarmingly—weak. Usually, the strength of a recovery is proportionate to the depth of the recession that preceded it. A Great Recession, in other words, ought to produce a Great Recovery. But apparently not this time. Here are six components of a healthy recovery that seem to be missing, fueling doubts about whether we’re really out of the woods:

Robust job growth. If the latest trends hold, then we’ve crossed a key threshold, with employers now adding jobs on net instead of eliminating them. But we’re in a huge hole, with more than 8 million jobs lost since 2007 and 15 million Americans still out of work. Employers added nearly 300,000 jobs in the latest month, which is obviously good news, but at that pace of growth it will take far too long for jobs to return and consumers to feel comfortable. Forecasting firm Decision Economics predicts that over the next three years, just 4.4 million new jobs will be created—barely half the number lost during the recession—which will still leave the unemployment rate above 8 percent in 2013. That’s unnerving, because weak job growth means incomes will stagnate, consumers won’t spend, and the whole economy will remain fragile. More government spending could help create jobs, except that massive federal deficits are already spooking the markets, and adding to them could do more harm than good.

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A powerful engine. Strong recoveries are usually led by a surge in consumer spending, which accounts for two-thirds of the U.S. economy. Housing in particular tends to take off as the economy starts growing again, boosting construction and many categories of spending that go with it. But consumers are still deeply in debt and worried about jobs, and in no mood to spark a vigorous recovery. “The American consumer is toast,” says Morgan Stanley economist Stephen Roach. “Maybe the only answer is for him to go to the tables in Las Vegas and pull a lucky number.” Housing activity is still anemic, despite huge price declines and some nifty bargains, with banks reluctant to grant loans and many buyers lacking the money for a down payment. With spending and housing so weak, economists are scratching their heads trying to figure what else might propel a recovery. The answer seems to be not much.

A small-business bounceback. Politicians love to extol small businesses, which account for about 65 percent of all new jobs. But Main Street firms have taken a beating over the past three years, with little help from Washington. “Small businesses have no access to credit. A record number of small businesses are closing,” says banking analyst Meredith Whitney. Optimism among small-businesses owners has been near historic lows for two years, and business owners saying they plan to cut jobs still outnumber those planning to add jobs. If small business doesn’t participate in a recovery, many of the nation’s workers won’t either.

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Wealth. It takes money to buy stuff, and Americans have a lot less of it than they did a few years ago. The stock market is still 25 percent below its 2007 peak, and home values, on average, have fallen more than 30 percent. All told, household net worth has fallen by about 30 percent since 2007, or $12 trillion. That amounts to about $102,000 per household in lost wealth. Americans will build that back up, but it will take a lot longer than most people realize. And many families have barely started. The savings rate, for instance, is still below 3 percent, and some economists think it needs to rise to nearly 10 percent for Americans before Americans regain lost wealth. When saving goes up, spending will go down, subduing economic growth.

Clarity from Washington. The government deserves credit for aggressive intervention that thawed a frozen financial system in 2008 and 2009, preventing an even steeper downturn. But Washington has also scared the daylights out of businesses and investors, with a barrage of confusing new regulations and partisan gridlock that makes business owners feel like hostages in an insane asylum. Businesses can usually manage new rules or requirements if they know what’s coming, but arbitrary or abrupt changes—like those threatened weekly in Washington—wreak havoc with business plans and make companies, and especially small businesses, reluctant to hire or invest. In addition to the new healthcare legislation--which hasn’t yet been translated into clear rules explaining how it will affect most companies—the Obama administration and Congress are considering major new financial reforms, tax changes, energy laws, and immigration policies that may or may not have a major impact on businesses. “Until we have clarity in the landscape that small businesses have to deal with, they’re going to be hesitant to hire people,” says Thomas Joyce, CEO of investing firm Knight Capital Group.

[See what Washington needs to learn from Greece.]

A self-reliant private sector. It’s easy to forget that the economy is growing thanks largely to massive government subsidies, which need to be wound down eventually. The government has rescued the financial sector, propped up housing, bailed out two huge automakers, subsidized car purchases, given a lift to the poor, and spent nearly $800 billion on stimulus programs to keep the economy afloat. “When that wears off, the slack can only be taken up by job growth,” says David Simon, CEO of the big mall operator Simon Property Group. “We’ll be on a sugar high the next couple of years, and then there could be a dramatic slowdown.” So enjoy that creeping sense of confidence, as mild as it might be. This could be as good as it gets for awhile.

  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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