Samuelson: Is the Economy Really Getting Better?

When things were going well, it was said that the United States enjoyed a Goldilocks Economy. Growth was fast enough to produce jobs and higher incomes but not so fast as to generate inflation. In the same vein, it might be said that today we have an Oscar-the-Grouch Economy. Good news is discounted. Pessimism is trendy. Growth is considered too feeble to help real people. But there is some genuine good news -- and it deserves attention.

It's most obvious in the labor market. The increase of 162,000 payroll jobs in March was the largest in three years. Layoffs have subsided to pre-recession levels. Job openings have ended their precipitous decline. Surveys suggest more gains. A poll of the corporate chief executives in the Business Roundtable found that 29 percent expect to increase jobs over the next six months, and only 21 percent expect to cut; not since the fall of 2008 have more CEOs expected to hire than fire. In March, the National Federation of Independent Business, a trade group for small firms, found no net job cuts -- the first time that's happened since April 2008.

What's also encouraging is that the recession's severity has left much pent-up demand. Mark Zandi of Moody's reckons that the underlying need for housing (new households, destruction of older homes) totals about 1.85 million units a year. Meanwhile, home and apartment construction is running at only about 600,000 a year. "We're working down a high inventory of unsold homes," says Zandi, "but housing will come back." The same logic applies to cars and trucks: Sales collapsed from 16.2 million in 2007 to 10.4 million in 2009. They're bound to rise.

A final favorable omen is corporate America's strong cash position, reflecting deep cuts in jobs and capital spending, says economist Nariman Behravesh of IHS Global Insight, a forecasting firm. In 2009, business cash flow equaled 11 percent of gross domestic product, the highest in at least half a century. As companies gain confidence that the worst is past, they have the cash "to make a bet on recovery" by restarting canceled investment projects, says Behravesh. IHS Global Insight expects business spending on machinery, computers and software to increase 9.6 percent in 2010.

One cause of pessimism is that the U.S. economy is undergoing a fundamental change -- and it's unclear how successful the transition will be. Beginning in the 1980s, American prosperity depended increasingly on a debt-financed expansion of consumer spending and housing, as the Economist's Greg Ip notes in a recent survey of the economy. In 1991, consumer spending and housing accounted for 70 percent of GDP; by 2005, their share was 76 percent. That boost has ended, because many families overborrowed, overspent and undersaved.

As Americans repay debt and shore up savings, consumer spending and housing weaken. In 2009, their share of GDP had already dropped to 73 percent. So the U.S. economy needs another growth engine. Exports and related investment are obvious candidates. This includes both expensive equipment (Caterpillar bulldozers, Intel chips) and sophisticated services (architectural designs, oil and gas drilling). But no one knows how well exports will do. Protectionism could flourish if, as Ip notes, "every country [looks] to exports to lead its recovery."

The deeper source of pessimism is the trauma inflicted by the economic slump. Unlike other post-World War II recessions, upper-income families shared the fear, as their stocks and housing wealth collapsed and their jobs vanished or seemed threatened. Overall payroll job losses of 8.4 million have been devastating in magnitude and duration. Among the unemployed, 44 percent have been without work half a year or more; the previous peak for comparable joblessness was 26 percent in June 1983. About half of unemployed workers 45 to 64 have been out of work for six months or more; for a third, unemployment has lasted more than a year. Almost any mature worker who's lost a job has struggled to find a replacement.

Life plans have unraveled. The Wall Street Journal recently profiled a six-figure investment manager who'd been laid off by General Electric, couldn't find a new job and worried about how to send his youngest daughter to college. Public psychology has darkened, because most upsets were unanticipated. People and companies have become more cautious, hedging against what they don't know. If the unexpected happened once, it could happen again.
The concerns aren't unrealistic, especially considering America's long-term problems (budget deficits, an aging society, weak state and local governments). Still, the glumness may be overdone, just as the optimism of the Goldilocks Economy was overdone. Public mood swings move the economy. The irony of today's pervasive pessimism is that, as people's worst fears are not realized, it could begin to lift and give the economy a surprising forward shove.

Robert Samuelson is also the author of The Great Inflation and Its Aftermath: The Past and Future of American Affluence and Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong.