The U.S. economy faces an anemic and jobless recovery once it emerges from its deep recession, with the financial system still too fractured to provide a full flow of vital credit.
Recent economic data have strengthened the argument that the downturn, now in its 17th month, would most likely end by the fourth quarter of 2009.
Even Federal Reserve Chairman Ben Bernanke’s tone on the economy has become less pessimistic. He told lawmakers on Tuesday that three-year U.S. housing slump was close to a bottom, and that the recession should end later this year.
The notion of the economy having passed through the darkest phase of the housing-led recession has prompted a massive stock market rally, with leading U.S. stock indexes up about 35 percent since early March.
Analysts said steep declines in economic activity are usually followed by a strong recovery in growth — a so called "V-shaped" recession if GDP data were pictured on a graph. The picture this time around, however, is very different.
Citing the continued stresses in the domestic banking system, lethargic consumer demand, a weak job market and a severe slump in Europe expected to last well into 2010, the recovery is more likely to look like a "slanted L shape" if displayed graphically, they said.
"There is no doubt that the recession is now winding down. The recovery itself will be very sluggish for the next year or two. It may very well turnout to be the mother of all jobless recoveries," said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, New Jersey.
"It will be more of an L-shaped curve, with the L a little bit lazy so that the line at the bottom of the L is tilted a little. It’s going to take a long time before the U.S. economy reaches the size it was back in December of 2007."
A Reuters survey of economists last month forecast growth in U.S. gross domestic product of 2.5 percent in 2010 after contracting by an expected 1.3 percent this year.
The government’s record $787 billion package of spending and tax cuts looks set to be the main catalyst behind the recovery, but analysts caution that the U.S. financial sector is so badly damaged and say it will take time for banks to recapitalize and get their balance sheets in order.
Cleaning up balance sheets weighed down by bad assets is essential for a healthy flow of credit to resume. Until it does, growth will face a constraint.
The collapse of the U.S. housing market after a boom fueled by years of cheap credit shattered the domestic financial system and forced the government to step in with a $700 billion rescue package to prevent it from crashing.
"Whenever there is a banking crisis, it takes a long time for banks to get their house back in order. We saw this during the Great Depression, we saw it in Japan, which resulted in a decade of lost growth," said Baumohl.
"As a result we will see banks remain very conservative with respect to their lending," he said.
Similar views were shared by other analysts who said the unprecedented loss of household wealth had fundamentally changed consumer behavior. Household net worth plunged by $11.2 trillion in 2008, according to Federal Reserve data.
Confronted with rising unemployment and increasing job insecurity, consumer have sharply cut discretionary spending and analysts do not expect a strong recovery as job losses are seen continuing well into 2010.
"The loss of household wealth in the last year implies that consumer spending will not come back very strongly. We worry that we might get an addition of strong recovery for a few quarters and then it will run out of gas," said Barry Bosworth, a senior fellow at the Brookings Institution in Washington.
"If we don’t solve the long term problems associated with the financial system we won’t have the basis for a sustained recovery."
But some analysts are not so sure recovery will come this year. A healthy pace of job growth probably won’t be realized until sometime next year, they said, keeping many households underwater and putting pressure on spending.
Consumer spending accounts for about 70 percent of U.S. economic activity. It contracted sharply in the second half of last year and rebounded slightly in the first quarter of 2009.
"We simply haven’t seen the duration or amount of despair that is typically seen at the bottom of a recession which is as bad as this one ought to be. This is worse than what happened in 1973/74 and the economy is more fragile," said Robert Loesta, fund manager at Integrity Funds in Minot, North Dakota.
"This is an L-shaped recession. We’re never going to return to the economy we had a few years ago that was fueled by massive amounts of borrowing and asset withdrawal. We might have a gradual upward climb on the bottom part of the L after 2010."
Analysts predict the economy would purge about 7 million jobs during this recession and that it would take between five to eight years for the economy to replace those jobs.
As of March, about 5.1 million jobs had been lost since the recession began in December 2007. (Reuters)
