Closer look: Recovery lost steam in mid-2010

A little more than a year since the recession ended, the U.S. economy is still struggling to get back on its feet. While the economy experienced 5 percent growth at the close of 2009 after the recession officially ended in the third quarter, that rate slowed to 3.7 percent in first quarter 2010, and to 1.7 percent in second quarter 2010.

“It’d be nice to say, what a difference a year makes,” said Robert Murray, vice president, McGraw-Hill Construction, New York, at the Outlook 2011 Executive Conference, Oct. 28-29, in Washington, D.C. “But we’re standing here today, saying ‘what happened?’ What happened to that recovery? In the first nine months [of the recovery], we saw a 3 percent decline in [total construction] starts, and going forward, it looks like negative 2 percent. And there’s a one-out-of-three chance of a double-dip recession.”

“If the financial markets lock up and oil prices jump or consumers remain scared, another dip is possible,” agreed Kathleen M. Camilli, president, Camilli Economics, New York, at the Outlook 2011 conference. “The recession has been the longest and deepest since WWII, and the recovery is likely to be slow and uneven.”

Murray still expects the recovery to be U-shaped, but warns that the possibility of a W-shaped recovery—or a “double dip” recession— remains. In 2010, the GDP was estimated to grow 2.6 percent, he said. “In 2011, we’ll see a low trend of growth, until the second half, when it’s expected to pick up.”

“A big factor will be employment statistics,” he said. “[2010] employment numbers seemed to be saying we were recovering, but there was a stall in the second quarter [as] layoffs of temporary census workers impacted the bottom line,” Murray said. “Given the sluggish pace, we’re probably looking at 10 percent unemployment [in 2011]. Hiring’s going to be a slog going forward. We will see a pickup in hiring in the mid-part of 2011.”

After a total job loss of 8.4 million in the past two years, employment figures increased in early 2010, according to the Construction Outlook 2011 report.  The hiring of temporary census workers boosted May’s employment increase to 432,000, but in June, with the pullback in government hiring, 175,000 workers lost their jobs. The next three months averaged 73,000 job losses.

The pattern of private employment also was a matter of concern. According to the Outlook 2011 report, job growth was up 158,000 in March, up 241,000 in April, but only up a modest 51,000 in May. During the June-September period, job growth averaged 84,000 per month. With unemployment at 9.6 percent, economists determined that the recovery had stalled.

 The monetary situation

“The U.S. stock market saw a great run from 1982-2000, but the secular bear began in 2000,” Camilli said. “We had two cyclical bear markets since 1982 -- in 1987 and 1990. Stocks were negative in the second quarter of 2009 for the first time in history. Stocks were overdue for a correction.”

“We think the rally will continue, but a near-term correction is likely. The long-term cycle probably has another bear in it,” Camilli said.

Stocks are still down from their 2007 peak, Camilli said. The world stock market experienced a “synchronized sinking and all industrial countries went into recession in 2008. Real GDP fell in the U.S., Japan and Europe, and softened in Asia. Developing countries looked like they might escape, until commodity prices plunged in the fourth quarter of 2008.” This was the largest outright decline in the U.S. GDP since the Great Depression, she said. It was a “deep economic bust.” 

The world GDP was estimated to recover 3.2 percent in 2010 from -0.9 percent in 2009, she said, with Asia as the growth center of the world. The Middle East, North Africa and South America also are experiencing growth now. “[In the U.S.], we have a deficit 10 percent of the GDP. It remains to be seen what the next leg of the Obama economic plan brings,” she said.  

In terms of monetary policy, both short- and long-term interest rates are very low, and long-term rates could go even lower, Murray said. “Since December 2008, the federal funds rate target was set at 0 percent to .25 percent. Over the course of 2008-09, the Fed took numerous steps to improve liquidity,” he said. From January 2010 to March 2010, the Federal Reserve purchased $1.25 trillion in mortgage backed securities and $175 billion in debt owed by government agencies, primarily Fannie Mae and Freddie Mac, according to the Outlook 2011 report. At the end of March, the Fed ended its purchase of mortgage securities, and long-term interest rates stayed low. “In August, the Fed indicated that it would engage in ‘quantitative easing,’ i.e., to buy up U.S. Treasury bills to keep long-term rates low and stimulate growth,” Murray said. It would also lower the U.S. dollar relative to foreign currencies, and make exports from domestic manufacturers less expensive overseas. 

Inflation overall has retreated and the U.S. dollar has dropped further. “Trade gap and Reserve diversification will send the dollar lower,” Camilli said. “Foreign money inflows have slowed, and credit default insurance rates are coming down, since after the Lehman Brothers filed for bankruptcy.”

What gave?

Why did the recovery stall and lose momentum mid-2010? The end of support from the $862 billion American Recovery and Reinvestment Act of 2009 was a big reason, Murray said. The stimulus provided a lift to the second half of 2009 and early 2010. Manufacturers rebuilt their inventory in the early part of the recovery, but let up as the stimulus ended. 

The expiration of the Build America Bonds program also contributed to the slowdown, Murray said. The BABs were created under ARRA to help finance infrastructure work, and they offered a federal tax credit subsidy. Set up to cover 2009 and 2010—with a total issuance of $137 billion as of October 2010—the BABs program was set to expire at the end of 2010, unless Congress voted to extend it.

The jobs act was another contributor to the recovery stall, according to the Outlook 2011 report. In response to concerns about weak employment growth, Congress passed a $17.6 billion jobs act on March 18, 2010. Specifically for construction, the act continued the multiyear federal transportation bill through Dec. 31, 2010. In addition, the jobs act gave employers an exemption from payroll taxes on workers they hired who had been unemployed for 60 days. The act also had allowed small businesses to accelerate depreciation on equipment purchases, and expanded the interest rate subsidies of BABs to apply to school construction and energy-efficiency projects.

The European debt crisis in May added one more element of uncertainty to an already struggling U.S. economy, stated the Outlook 2011 report. It generated more anxiety, and caused U.S. stocks to take a nosedive and perform their worst that month in more than a year. The budget deficit in Greece raised fears at home that the defaults would affect the U.S. banks as well. Those fears have subsided since the European Union and the International Monetary Fund gave a $1 trillion aid package to Greece and other struggling nations, and the European Central Bank began to buy up their sovereign debt.

Other reasons fueling the stall included uncertainty over tax policy, healthcare reform and financial regulatory reform.

 Looking ahead

“The recession was the longest and deepest since the 1930s, and the economy will recover slowly,” Camilli said. Although consumer spending led recent expansions, wealth is down because home prices have dropped. “Wealth slides with home and stock prices. The primary asset that Americans own is their home. When the value of their home declines, their wealth declines,” she said.  In addition, borrowing is more difficult and home equity loans less available. “It’s a double-whammy,” Camilli said. More cautious banks, high unemployment and lower consumer confidence also will contribute to the slow economic recovery, she predicted.  “We’ll see a small amount of economic growth in 2011 and 2012, after which it will recover at a more normal rate. Fiscal stimulus will support the recovery,” she said.

The economy will continue to see below-trend growth through the first half of 2011, according to the Outlook 2011 report. The fed will take steps to lower long-term interest rates, which will help investment to improve in coming months. After the November 2010 elections, Congress was expected to pass an extension to the tax cuts implemented during the Bush administration. This would extend to all income levels except households earning more than $250,000 per year. At press time, it was still unclear how taxes would impact the 2011 economy.

Going into next year, employers will remain hesitant about hiring, but this should improve later in the year as the result of favorable corporate profits. Low long-term interest rates will help investment in general, and the second half of 2011 should see a pickup in activity after a sluggish start. Overall, the U.S. economy is projected to grow 2.5 percent in 2011, about the same as the 2.6 percent rate of expansion for 2010 as a whole, according to the report.