It Is a Recovery, but a Long, Slow One

07/22/2010 12:00 pm EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says the economy is recovering, but most people won’t notice it until next year.

Is the economy still in recession?

Most Americans think so. With millions of would-be workers jobless, foreclosures rising, and home prices in the toilet, to many folks, it must feel as if the economy is still shrinking.

Strictly speaking, though, it’s not true. The economy is growing, albeit slowly.

The problem: It’s a long climb back up from the trough that the economy fell into. The trend is in the right direction, but employment, output, real estate prices, housing construction, and sales fell so sharply that it will be months, maybe a year, before much daylight can be seen.

Worse, the ground has gotten spongier in recent weeks. Private sector job gains slowed, retail sales dipped, and the housing pickup wilted. That sponginess won’t persist, however. The housing tax credit’s impact will fade: First, it exaggerated sales. Now, its disappearance is overstating the housing market’s weakness.

An underlying trend of modest sales improvement will reemerge. How modest? By December, 10% over last year’s level is a decent bet. That’s about how much higher home sales were in the first three months of 2010 (before buyers geared up for round two of the tax credits) than they were in January-March of 2009, before the initial round of federal tax credits for home buyers really kicked in.

Jobless benefits will be extended again, putting money back in the pockets of about three million long-term unemployed. When the benefits hit, probably next month, about $4 billion in back payments will help spur a rebound in retail sales.

And fears about a worst-case, European-led global meltdown have eased. Though risks remain, actions to rein in deficits, combined with stiff financial backing from the International Monetary Fund and the European Union, have investors less worried about the scenario.

As the economy hits firmer ground, modest gains will become more apparent. Current calls for more fiscal stimulus will start to die out. The fact is, there’s a hefty dose of economic grease still in the pipeline. As of June 30th, nearly half of the 2009 stimulus package of tax cuts and spending hikes hadn’t been realized.

Neither will demands for serious, immediate deficit reductions take hold. Too many policymakers, including some prominent deficit hawks, are wary of cutting the support cord prematurely. They fear torpedoing a nascent recovery, as Japan did in 1997 when it tried to rein in its deficit by raising the consumption tax.

In time, deficit reduction will take precedence, with most policymakers in the administration and Congress broadly agreeing that spending must be cut. Whether politicians can agree on what to cut is a different matter.

Subscribe to The Kiplinger Letter here…

Related Articles on MARKETS