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U.S. economy has rocky road to recovery
Commentary: Many obstacles remain for a real turnaround
By Irwin Kellner, MarketWatch
Last Update: 12:14 AM ET Jun 2, 2009
PORT WASHINGTON, N.Y. (MarketWatch) -- The U.S. economy is encountering a number of potholes on the road to recovery.
If the recession does wind down later this year, as many economists now expect, it will be nothing short of a miracle.
The natural forces that turn recessions into recoveries, such as the inventory cycle and a rising stock market, are being overwhelmed this time around by a number of negatives that have suddenly cropped up.
Take the lack of fiscal stimulus, for example.
As I wrote last week (see May 26 column), only about $50 billion of the $787 billion stimulus package has hit the economy so far. Any additional funds will be equally slow in coming, since they are earmarked for states and local governments to upgrade their infrastructure, which can't be done overnight.
Even if this sum was tripled, it would clearly not be enough cash to turn the economy around from what in many respects is the worst recession since the 1930s.
As for monetary policy, the Federal Reserve may have pumped prodigious amounts of liquidity into the economy through its open market operations, purchases of Treasurys and other securities, and its plethora of special lending programs, but to little avail. The reason is that the banks are still being parsimonious when it comes to lending money.
Even those who do manage to snag a loan are finding that interest costs are up. Today, the yield on the Treasury's bellwether 10-year note hit 3.67% -- the highest level in more than eight months. This could easily curtail the nascent rise in mortgage applications, as well as other types of loans.
To add insult to injury, the price of oil and gasoline has been skyrocketing. Today, the price of regular gas hit $2.52 a gallon -- the highest in seven months and 58% more than this year's low, set back in January. This is bound to curtail both driving and spending.
Other prices are rising as well -- some visible and some below the radar as sellers shrink portion size. (See my column of Mar. 24.) Needless to say, this is sapping purchasing power, too.
To make the best of a bad thing, many households are trying to rebuild their savings accounts. In other words, doing without is in.
The savings rate has surged to a 15-year high of 5.7%. While admirable in the long run, this sudden shift to thrift threatens to diminish the economy's chances of bouncing back over the near term.
Another impediment to consumer spending, and thus to the economy at large, is unemployment. Not only is the jobless rate the highest since the 1980s, but it is also tough for those without work to find jobs. Witness the nearly 7 million people collecting unemployment benefits -- a multi-year high.
On top of all these developments, the bankruptcies of Chrysler and General Motors will add to the woes of the beleaguered manufacturing sector. Workers in a variety of industries that supply these automakers will lose their jobs. So will their dealers.
With potholes like these, the economy is more likely to blow a tire than to ride smoothly into a recovery.
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