Phase II Of The Recession Looms In 2010

The recovery seemed so certain just a month ago. The American economy would be out of the recession before the end of the year. A number of arrows have pointed in that direction. The May unemployment figures were tame despite the ongoing human toll of rising job losses. Housing prices are not plunging at the same rate that they were earlier in the year. The revisions of the numbing GDP drop of the first quarter have improved the number slightly. The assumptions for deteriorating second quarter GDP is that it will be so much better than the first quarter that the American consumer will be less afraid to make even modest purchases. The auto sales figures for June appear to give some support to the idea that not all of the cash available for consumer spending has been put into mattresses.

Esteemed Harvard economist Martin Feldstein believes that the recovery is an illusion. He expects what professionals call a “W” shaped recession. The first dip is behind us. The second is yet to come, probably early next year. Friedman told Bloomberg that he thinks that the current brief recovery will be robust but that it cannot be sustained.

The latest employment numbers were worse than expected. The ADP report showed that 473,000 people lost jobs last month, much more than forecast. The way that the federal government figures compare to ADP’s should mean that the June unemployment statistics will reveal that well over 500,000 people lost jobs last month. The jobless rate could go to 9.7% or 9.8%, which is above projections.

The auto sales figures may have been encouraging to industry analysts and experts on consumer spending, but they only demonstrate that the industry’s domestic sales rate is recovering to 10 million units a year. That is not nearly enough to sustain any car company doing business in the US, even if it is better than the sales rate of 9.5 million from the first quarter. The companies in the car sector have to ask themselves whether they are in a witch’s brew of rising unemployment and a permanent change in auto buying habits. A population that used to keep cars for two years is now willing to keep them for four. It could be a change in behavior which, over the long term, would be more damaging to the industry than the recession has been. America could become a nation where people do not think their cars are “old” until they have 100,000 miles on them.

Economists and the Administration have to accept the fact that the consumer ‘s psychology may have been so profoundly affected by job loss and the falling value of real estate and other assets that his frugality could last for years. There has been some conversation from within the government that a second stimulus package may be needed. It is hard to imagine that the first $787 billion may not be enough to prime the pump of the economy, but, so far, almost no one believes that average citizens feel that the package has made them better off than they were a year ago.

This is where the economy stands today. It is teetering on the edge of the consumer’s comfort and gravity is still pulling it in the wrong direction. A second stage of the recession is coming because too many people think that the first stage is not over.

Douglas A. McIntyre