Is recession nearing end

August 31, 2009
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New home sales are skyrocketing, the Dow is at its highest point of 2009 and consumer confidence is ticking up. We're coming out of the recession, right?

There is no specific rule of thumb here, but in many recoveries we see increasing consumer confidence leading the way in a sustained economic recovery once we see the bottom. That means that cautious spenders become more likely spenders. However, in this recovery there seems to be a social impetus to stop being a nation of consumers and return to being a nation of savers. As a result, I do not believe this will be a consumer-led recovery and I do not think it will be quick.

In looking at the "recovery," there are some interesting things happening. While the unemployment rate is flattening out, there seem to be record numbers of part-time and temporary workers in the employment base, who, if they are not collecting benefits, are not counted in the reported unemployment numbers.

Many of these part-time temporary jobs appear to be the result of one-off fiscal stimulus programs, but some exist as a result of firms looking for ways to cut back on employment expenses without shutting down altogether. If the economy really is improving, we should expect to see the private sector bring some of those part-time and temporary jobs back to the full-time, permanent job rolls first, which will barely make a dent in the unemployment rate as it sits today.

Jobs tied to stimulus package funds earmarked for 2010 — particularly in infrastructure improvements that require heavy construction, along with production of the supplies necessary to conduct that work such as cement and steel — will come next. Since people are going to be more tied to their homes because of their mortgage situations, and as landlords buy fire-sale properties from banks, I think it is likely that home improvement retail and contracting and their associated suppliers also will see the first signs of a recovery.

The basis of my opinion here is that that monetary policy picture is far from rosy. What I've seen in the data suggests that the Fed target interest rate necessary to bring the economy back to the natural rate of unemployment or the Non-Accelerating Inflation Rate of Unemployment is negative. No bank will pay people to borrow and no saver is willing to take a negative rate of return. So, until banks can figure out how to lend at a loss, this recovery will likely be tied to the specifics of the stimulus packages as opposed to the natural inclination of consumers with access to credit.

John Grether is an associate professor at DeVos Graduate School of Management at Northwood University. He holds a BBA in economics and management from Northwood University, a JD Law from Michigan State University and an MA in economics from Central Michigan University.

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