Gross: Are We Out of the Economic Slump Yet?

James Porto / Getty Images

Pundits will say President Obama's poll numbers are rising because he can define himself against the GOP, he's cutting deals, and he's shifting to the center with new appointments. Bollocks. Most Americans can't tell Bill Daley (the new, corporate-friendly chief of staff) from Rahm Emanuel (the old, corporate-friendly chief of staff). No, Obama's slowly improving political fundamentals—just in time for his State of the Union address, thank you very much—can be attributed to steadily improving economic fundamentals. In early January, he said, "We've got a big hole that we're digging ourselves out of." But how much of the shoveling is behind us—and how much more do we have left? We offer a progress report on the recovery.

In the annals of financial contractions, the Great Recession was an unusual one—for its length (18 months), origins (housing, credit, fatigued consumers), ferocity, and depth (for half a year, the economy shrank at a cataclysmic 6 percent rate). It's also been unusual for the herky-jerky recovery. Typically, the American economic juggernaut comes roaring out of hibernation once factories and stores work off excess inventory and recall laid-off workers. Not this time. The economy was led into recession by the coasts, where the collapse of expensive, highly leveraged housing markets wreaked the greatest havoc; by high-growth -housing-boom metroplexes like Las Vegas, Phoenix, and Miami; and by free-spending consumers with debt. And it was led out of recession by foreigners and flyover country. The grain- and energy--producing heartland (the unemployment rate in North Dakota is 3.8 percent) powered through the downturn because global demand kept prices for oil, soybeans, and wheat high. Exports began to rise in spring 2009, while the economy was still mired in recession, and have bounced back impressively. They were up 15 percent in 2010.

Photos: Life on the Economic Edge Spencer Platt

Consumers were generally spectators during the first phase of the recovery. Unable to pry jobs or higher wages from bosses, and stuck in homes that continued to lose value, the mighty American consumer muddled through—stowing away pennies in accounts that paid little interest and hacking down credit-card debt. The savings rate, which nearly touched zero, has been hovering at 5 percent—a rate not seen since Ike's time. As 2010 progressed, employment rose (slowly) and purse strings loosened. And we began to see the first signs of a virtuous circle. More private-sector output led to more private-sector hiring, which supported more spending, which, in turn, led to more output.

Still, there are three big questions for 2011: First, can the strengthening recovery, which was powered by auxiliary government engines—the Federal Reserve's aggressive actions, tax cuts, stimulus spending—keep going when those engines idle? Second, will the masses finally reap the benefits that have largely flowed to the rich? While upper-income folks have seen their portfolios reflate, those in the middle are still grappling with the long-lasting effects of the credit and housing debacles. In December, when housing prices fell again, 36 percent of home sales were distressed properties, a higher proportion than in December 2009. States and cities are entering year three of brutal cuts to jobs, benefits, and services. And third, will the world intrude on America's recovery? For the past two years, foreigners have done so much to help America in its post-crash time of need. They helped keep interest rates low by investing in U.S. government bonds and spent freely on U.S. goods and services. International arrivals here were up 10 percent in 2010. America's ability to get its financial house in order—and the president's approval ratings—now depend, in part, on the health of the global economy.

Gross is economics editor at Yahoo Finance.