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Rex Nutting
April 25, 2011, 12:01 a.m. EDT
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By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) "” Americans are justifiably anxious about the economy. Polls and surveys show a deep-seated pessimism about not only the present, but also the future.
The recovery from the Great Recession has been so weak and so drawn out that many Americans doubt that the nation can ever regain its vigor. It's been nearly two years since the economy began to recover in a technical sense, but what do we have to show for it?
High unemployment. Low wages. High gas prices. Falling home prices. An aggressive Federal Reserve. A dysfunctional Congress. A president known for his oratory who still hasn't found the words that could give us hope again.
Ben Bernanke of the Federal Reserve will debut an unprecedented series of news conferences following the central bank's policy-making meeting on Wednesday. MarketWatch's Greg Robb says the practice will reshape the way investors decipher the Fed's policy pronouncements.
Given the weak performance of the economy, the frustration is understandable. But the tepid economic growth that underlies our fears was utterly predictable. In fact, it was predicted.
The economic recovery, as weak as it has been, has been pretty much as advertised. We should be disappointed that it hasn't been better, but not surprised. And we shouldn't be so discouraged by the lack of progress.
We've let the sluggish pace of the recovery get us down. We've come to doubt the ability of anyone to make a difference.
The extraordinary government response "” the tax cuts, the stimulus, the TARP, the 0% federal funds rate "” were designed merely to staunch the bleeding, not to restore the economy to full health; only time could heal that wound.
Even before Barack Obama took the oath of office in January 2009, he was counseling patience. "It will take time, perhaps many years" to rebuild confidence in the economy, the markets and the government, he said.
The Federal Reserve said the same thing, as did the International Monetary Fund, the Congressional Budget Office and professional economic forecasters. Almost universally, they believed the recovery would be agonizingly slow, much slower than is typical after a garden-variety recession. They were right.
Most recessions since World War II have followed the same pattern: After several years of strong growth, inflationary pressures begin to build, prompting the Fed to raise interest rates to choke off inflation. Sometimes the Fed can achieve a so-called soft landing, but sometimes the Fed tightens too hard and the economy falls into a recession, which generally lasts a year or so.
The ensuing recovery is fairly robust, with employment and output snapping back rapidly. It's not unusual to see gross domestic product rise more than 7% in the year following a recession.
The Great Recession was an entirely different creature. The cause of the downturn was different, the extent of the damage was different, and the pattern of recovery is different. The Great Recession was to normal recessions as a dolphin is to a fish: Any resemblance is purely superficial.
The Great Recession had its roots in a massive global credit bubble centered in residential real estate. Once the bubble burst, the financial sector lay in ruins and households found themselves with an insupportable level of debt. The historical record shows it can take years to restore the banking system to health and for households to deleverage, especially if asset prices continue to decline.
In a paper published in early 2009 summarizing research into 122 recessions worldwide, the IMF warned that "recessions associated with financial crises have typically been severe and protracted" and that "recoveries from recessions associated with financial crises have typically been slower, held back by weak private demand and credit." Read the IMF's report on financial recessions.
The IMF and the other forecasters got it right. The Great Recession was the longest and deepest since the Great Depression of the 1930s, and the recovery has been the weakest since then.
During the 18-month recession, output plunged 4.1%, more than double the average decline of 1.9% in the 10 other post-war recessions. The declines in consumption and investment were the largest since the Great Depression. The unemployment rate doubled, rising from 5% to 10.1%, by far the largest increase since the war.
If the recession was unusually severe, then the recovery has been unusually tepid. It took six quarters for real gross domestic product to exceed the pre-recession level, longer than after any other post-war recovery. Growth has averaged 2.9% on an annual basis during the recovery, significantly slower than the 5.3% average growth seen after other recessions, but almost exactly what economists were forecasting.
With the economy growing only modestly faster than the population and productivity trends, there won't be much job growth in the next few years from the private sector. Forecasters surveyed by the Philadelphia Fed every quarter are now predicting that the unemployment rate will average 9% this year, more than 8% next year, and more than 7% in 2013 and even into 2014. The CBO says the economy won't reach full employment until 2016, and the Fed says it could take five or six more years for the unemployment rate to drop back to normal.
That will not do. We are Americans, and we demand immediate satisfaction, if not today, then yesterday. If we cannot wait 15 minutes for rice to cook, or a day for the DVD to arrive in the mail, we certainly cannot wait six years for the economy to recover.
We think it must be somebody's fault. We point the finger at the stimulus, or the Fed, or Obama, or the deficits, or George Bush or the greedy banksters.
This blame game is thoroughly entertaining, but it's also toxic to our politics. Instead of productively employing our idle resources, we're fixating on a phony debt crisis. Instead of coming together to build that better future, we seem to have given up on the dream of a just and prosperous economy that works for everyone, as we scurry to grab every crumb we can for ourselves before the inevitable collapse.
It could be that the biggest casualty of the Great Recession will be our faith in ourselves. We've just got to remember to give it time.
Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington.
Sen. Charles Schumer has it right about the loss of NYSE jobs, but both the Nasdaq-ICE offer and the Deutsche Boerse deal are about cuts, writes David Weidner.
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