Why the Economy Isn't (Quite) as Bad as It Seems

5 bright spots in the economic data

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The wobbling housing market can barely stand on its own two feet. Lackluster job growth and depressed consumer spending are dragging down an already-fragile recovery. And across the Atlantic, a debt crisis is testing the resolve of national governments. With the economy facing a veritable laundry list of crises, the current outlook leaves little room for optimism.

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"We've got these big holes in the economy with not a whole lot offsetting it, leaving us with an economy that's improving and is likely to continue to improve, but not all that much and not all that fast," says Ken Goldstein, an economist for the Conference Board. "It's very hard to make a strong case for [the current climate]."

Meanwhile, the dramatic recovery, which saw the stock market outrun the real economy on the back of a wave of optimism, has largely petered out. As economic indicators continue to deteriorate, some have sounded the alarm that a double-dip recession could be approaching. But even as the possibility looms that the economy could slide back into recession territory, economists are still by and large betting against it. Lifted by a handful of bright spots in the otherwise bleak economic data, the prevailing sentiment appears to be that the ongoing slump is just a bump in the road.

"While there's been lots of double-dip talk here, I believe what we're really experiencing is just a soft spot," says Burt White, the chief economist at LPL Financial. "The problem is that the market can't tell the difference … between changing speed and changing direction. … We can't come out of a recession and go through a recovery and just keep growing faster and faster, because eventually you'd have soaring inflation and all kinds of other issues. Eventually recoveries have to moderate to more normalized growth levels, and that's what we're seeing. So we're seeing a change in speed in the expansion; we're not seeing a retraction."

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This possibility—that the economy is normalizing as recovery slowly gives way to business as usual—is, of course, the best case scenario in a long list of eventual outcomes. Still, there certainly are some positive factors to support it. Here's a look at five of them:

High earnings forecasts. Earnings season kicks off this week, and it's important to see if businesses are growing earnings at a rate high enough for them to begin reinvesting in things like new equipment. "Corporate earnings are critical," says Tom Higgins, chief economist at the investment firm Payden & Rygel. Analysts are not expecting some companies' earnings to be as high as they were in the first quarter, but many experts continue to have high expectations. "We're still going to see double-digit growth in the [second quarter] earnings, and that's certainly strong enough to keep business investment growing," Higgins says.

White believes we could see the highest earnings ever reported by S&P 500 companies. This could help prompt businesses, which have been stockpiling cash and are still spending at pre-crisis levels, to step on the accelerator. "Business spending is the next runner in this marathon relay race," says White. "The first runners were China, central banks, and governments. That's who has been running so far; they've got to pass the baton to the next runner."

During the recession, businesses slashed their operating costs, which put a damper on new-product creation. White expects the situation to improve in the second half of 2010 as competition forces businesses to invest in new designs. "During the recession, you went out of business if you didn't stop spending," he says. "Now you're going to go out of business if you don't start spending, because your competitors will put you out of business. The good companies are beginning to make that transition now, and it's going to force their competitors to make that transition too to keep up."

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