The National Bureau of Economic Research declares the recession ended in June 2009.

Business Cycle Dating Committee, National Bureau of Economic Research

This report is also available as a PDF file.

CAMBRIDGE September 20, 2010 - The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.

The committee waited to make its decision until revisions in the National Income and Product Accounts, released on July 30 and August 27, 2010, clarified the 2009 time path of the two broadest measures of economic activity, real Gross Domestic Product (real GDP) and real Gross Domestic Income (real GDI). The committee noted that in the most recent data, for the second quarter of 2010, the average of real GDP and real GDI was 3.1 percent above its low in the second quarter of 2009 but remained 1.3 percent below the previous peak which was reached in the fourth quarter of 2007.

Identifying the date of the trough involved weighing the behavior of various indicators of economic activity. The estimates of real GDP and GDI issued by the Bureau of Economic Analysis of the U.S. Department of Commerce are only available quarterly. Further, macroeconomic indicators are subject to substantial revisions and measurement error. For these reasons, the committee refers to a variety of monthly indicators to choose the months of peaks and troughs. It places particular emphasis on measures that refer to the total economy rather than to particular sectors. These include a measure of monthly GDP that has been developed by the private forecasting firm Macroeconomic Advisers, measures of monthly GDP and GDI that have been developed by two members of the committee in independent research (James Stock and Mark Watson, (available here), real personal income excluding transfers, the payroll and household measures of total employment, and aggregate hours of work in the total economy. The committee places less emphasis on monthly data series for industrial production and manufacturing-trade sales, because these refer to particular sectors of the economy. Movements in these series can provide useful additional information when the broader measures are ambiguous about the date of the monthly peak or trough. There is no fixed rule about what weights the committee assigns to the various indicators, or about what other measures contribute information to the process.

The committee concluded that the behavior of the quarterly series for real GDP and GDI indicates that the trough occurred in mid-2009. Real GDP reached its low point in the second quarter of 2009, while the value of real GDI was essentially identical in the second and third quarters of 2009. The average of real GDP and real GDI reached its low point in the second quarter of 2009. The committee concluded that strong growth in both real GDP and real GDI in the fourth quarter of 2009 ruled out the possibility that the trough occurred later than the third quarter.

The committee designated June as the month of the trough based on several monthly indicators. The trough dates for these indicators are:

Macroeconomic Advisers' monthly GDP (June)
The Stock-Watson index of monthly GDP (June)
Their index of monthly GDI (July)
An average of their two indexes of monthly GDP and GDI (June)
Real manufacturing and trade sales (June)
Index of Industrial Production (June)
Real personal income less transfers (October)
Aggregate hours of work in the total economy (October)
Payroll survey employment (December)
Household survey employment (December)
The committee concluded that the choice of June 2009 as the trough month for economic activity was consistent with the later trough months in the labor-market indicators–aggregate hours and employment–for two reasons. First, the strong growth of quarterly real GDP and real GDI in the fourth quarter was inconsistent with designating any month in the fourth quarter as the trough month. The committee believes that these quarterly measures of the real volume of output across the entire economy are the most reliable measures of economic activity. Second, in previous business cycles, aggregate hours and employment have frequently reached their troughs later than the NBER's trough date. In particular, in 2001-03, the trough in payroll employment occurred 21 months after the NBER trough date. In 2009, the NBER trough date is 6 months before the trough in payroll employment. In both the 2001-03 and 2009 cycles, household employment also reached its trough later than the NBER trough date.

The committee noted the contrast between the June trough date for the majority of the monthly indicators and the October trough date for real personal income less transfers. There were two reasons for selecting the earlier date. The first was described above -- the fact that quarterly real GDP and GDI rose strongly in the fourth quarter. The second was that real GDI is a more comprehensive measure of income than real personal income less transfers, as it includes additional sources of income such as undistributed corporate profits. The committee's use of income-side measures, notably real GDI, is based on the accounting principle that the value of output equals the sum of the incomes that arise from producing the output. Apart from a random statistical discrepancy, real GDI satisfies that equality while real personal income does not.

The committee also maintains a quarterly chronology of business cycle peak and trough dates. The committee determined that the trough occurred in the second quarter of 2009, when the average of quarterly real GDP and GDI reached its low point.

For more information, see the FAQs and the more detailed description of the NBER's business cycle dating procedure at http://www.nber.org/cycles/recessions.html. An Excel spreadsheet containing the data and the figures for the indicators of economic activity considered by the committee is available at that page as well.

The current members of the Business Cycle Dating Committee are: Robert Hall, Stanford University (chair); Martin Feldstein, Harvard University; Jeffrey Frankel, Harvard University; Robert Gordon, Northwestern University; James Poterba, MIT and NBER President; James Stock, Harvard University; and Mark Watson, Princeton University. David Romer, University of California, Berkeley, is on leave from the committee and did not participate in its deliberations.

[ NBER Home Page | More information ]

NBER, 1050 Massachusetts Ave., Cambridge, MA 02138, 617-868-3900, www.nber.org


(September 20, 2010)

Buffett warns Obama U.S. economy only halfway back

Recent surveys suggest that U.S. citizens are increasingly dissatisfied with President Obama's leadership, primarily because unemployment remains high. What people fail to realize, however, is that economic recovery frequently takes time, regardless of the actions taken by political leaders. Billionaire Warren Buffett understands this and conveyed his feelings to the President.

Political leaders frequently receive too much blame for poor economic performance and too much credit for prosperity. A better understanding of the sources of economic growth might make public perceptions more accurate.

In the July 16 Reuters article "Buffett warns Obama U.S. economy only halfway back," Alister Bull summarizes Buffett's claim that the economic recovery will take time, regardless of the country's leadership.

WASHINGTON (Reuters) – President Barack Obama heard a sobering message from Warren Buffett when he asked for the investment guru's views about the economic recovery, according to an interview Obama gave NBC News on Thursday.

"I'll tell you exactly what Warren Buffett said. He said, 'We went through a wrenching recession. And so we have not fully recovered. We're about 40, 50 percent back. But we've still got a long way to go'," Obama told NBC during a visit to Holland, Michigan, to promote his job creation policies.

Obama chatted with Buffett in the Oval office on Wednesday as he sought ideas on how to translate higher U.S. growth into stronger hiring. This would help him deliver on an election year promise to tackle unemployment currently at 9.5 percent.

Buffett, who built an estimated $47 billion fortune running his insurance and investment company Berkshire Hathaway Inc, warned Obama the recession created a huge overhang of excess capacity in the economy that would simply take time to mop up.

Obama said Buffett specifically used the example of the U.S. housing market, noting 1.2 million new homes were built on average per year in the United States, according to historic trends. That number soared above 2 million during the property bubble, but construction activity has since collapsed.

"What Warren pointed out was, look, we're gonna get back to 1.2 (million). But right now we're soaking up a whole bunch of inventory. So a lot of -- the challenge is to work our way through this recession," Obama said.

High unemployment is another type of excess economic capacity. Obama's Democrats risk severe punishment by voters in midterm congressional elections on November 2 if he fails to convince them stronger U.S. growth means better times ahead.

AP survey: Recovery to remain sluggish into 2011

In the April 12, 2010 article "AP survey: Recovery to remain sluggish into 2011," Associated Press economics writer Jeannine Aversa says a survey of economists suggests U.S. economic growth will remain quite modest until at least 2011.

"Among the first survey's key findings:
• The unemployment rate will stay stubbornly high the next two years. It will inch down to 9.3 percent by the end of this year and to 8.4 percent by the end of 2011. The rate has been 9.7 percent since January. When the recession started in December 2007, unemployment was 5 percent.
• Home prices will remain almost flat for the next two years, even after plunging an average 30 percent nationally since their peak in 2006. The economists forecast no rise this year and a 2.3 percent gain next year.
• The economy will grow 3 percent this year, which is less than usual during the early phase of a recovery and the reason unemployment will stay high. It takes growth of 5 percent for a year to lower the jobless rate by 1 percentage point, economists say."

Signs the economy is really getting better

In the April 6, 2010 U.S. News & World Report article How To Tell When The Recession Is Really Over, Rick Newman says "the recession is officially over, but many Americans won't feel the recovery until these things happen."

There are two kinds of recessions: the one that economists measure, and the one that ordinary people feel.

The official recession is over. That's because the economy is growing again after a sharp decline, with GDP back to the levels of mid-2008. For people who have kept their jobs, suffered no loss of income and enjoyed a rebound in their investments thanks to the year-long stock market rally, things are pretty good.

Then there's the unofficial recession, which clearly persists. More than 8 million people have lost their jobs over the past two years, and the economy has barely started to add those back. Many others have had their pay or hours cut. The housing bust, in its fourth year, still isn't over. Foreclosures continue to mount, businesses and consumers remain gloomy, and many families are struggling to get by on reduced income. "It's a recovery, but it sure doesn't feel like it," says Nariman Behravesh, chief economist for forecasting firm IHS Global Insight. Here are five things that still must happen for a robust recovery to kick in.

Banks need to lend more. The government's emergency measures helped stabilize the financial system, but banks haven't taken the next step and increased lending. With trillions in bad loans still on their books, many banks continue to hoard cash and turn down loan applications. That depresses the market for homes, cars, appliances and other costly items that many consumers can't pay for in cash. It also squeezes small businesses, which often rely on credit to meet payroll, order supplies, invest and grow. Behravesh predicts that lending could bottom out and start to pick up by late this year or early next year--although that would probably be the point at which the Federal Reserve starts to raise interest rates to subdue inflation. A few things that will signal improvements in the credit market: a drop in the required down payment for well-qualified home buyers, which is typically 30 percent or more now; increased availability of car loans for subprime borrowers with a credit score below 680; and banks' willingness to increase their customers' credit-card limits, if asked.

Incomes need to rise. Median income was stagnant for about a decade leading up to the recession, and it probably fell 5 percent or more over the past couple of years. Some economists worry that reduced incomes could indefinitely curtail consumer spending, which has long fueled the U.S. economy. A glut of unemployed workers will keep wages low in many industries for years. And since many families have lost wealth because of falling home values or declining investment portfolios, or both, they need to save more to prepare for retirement. That leaves less money to buy stuff. The good news is that inflation is low and energy prices are stable, which helps stretch a dollar.

Housing needs to stabilize. Most of the pain is probably in the past, but home values continue to erode in many regions. Moody's Economy.com predicts that house prices, which have fallen more than 30 percent from their 2006 peaks, could still fall another 5 to 10 percent through the end of this year. Since many families still have the majority of their wealth invested in their homes, the economy can't really get healthy again as long as such a huge asset is falling in value. The end of the federal home-buyer tax credit and other government programs throughout the year will test whether the housing market can stand on its own. If it can't, the government could step back in, but that would only signal further weakness in a sector that accounts for more than 15 percent of the economy. The silver lining is that falling prices make it a great time to buy, for those with enough cash or the ability to get a mortgage.

Confidence needs to rebound. Americans remain gloomy, with most consumer-confidence surveys showing only modest improvements from the low points hit during the recession. The most obvious reasons are the weak job market and a sense that the recovery will be weak at best. Businesses are downbeat too, with CEOs worried that strapped consumers will put their wallets away. That makes them reluctant to hire, which perpetuates the malaise. Confidence is a perplexing psychological phenomenon, and economists aren't sure what it will take to make consumers upbeat enough to propel a robust recovery. But once home prices stop falling, jobs seem more secure, and people feel like the bloodletting is over, that will certainly help.

Jobs need to return. The availability--or lack--of jobs is the single biggest factor in the economy, and unfortunately, a pickup in hiring is likely to be painfully slow. Many of the 8 million lost jobs are probably gone forever, as manufacturers downsize their operations and many companies substitute technology or cheaper foreign labor for American workers. The unemployment rate, which is 9.7 percent now, might even rise throughout the year, as workers who gave up looking for jobs try again and the labor force swells.

Still, economists recognize some familiar patterns in the job market that suggest things are finally getting better instead of worse. Corporate profits are strong, thanks to aggressive cost-cutting over the past two years. That means companies can afford to hire workers, if they decide to. And productivity gains have hit record levels recently, which means companies are extremely efficient; if demand picks up, they may only be able to meet it through increased staffing. A good indicator of real improvement would be several consecutive months of six-figure job gains, due to permanent hiring and not temporary factors like the census or weather-related events. "The recent resumption of employment growth will be sustained and gather strength over time," insists T. Rowe Price chief economist Alan Levenson. That's not the kind of roaring endorsement most Americans want to hear, but it suggests that sooner or later, the recovery in your neighborhood will catch up with the one that economists see in the data.

Poster child for recession shows signs of recovery

In the January 2, 2020 article "Poster child for recession shows signs of recovery," Associated Press writer Charles Wilson says Elkhart, Indiana, one of the cities hit hardest by the Great Recession, is showing signs of economic recovery:

ELKHART, Ind. – When Ed Neufeldt introduced Barack Obama at a speech in Elkhart County in February, the new president promised the laid off RV worker would find a job.

Since then, Neufeldt has found two, setting up bread displays in grocery stores and working with a company that hopes to hire hundreds of people to make electric motors.

"If I was on unemployment, I'd be bringing home more money than I bring home from both jobs," said Neufeldt, 63, of Wakarusa. "But that's OK, I want to work and I feel like I'm helping the economy a little not being on the unemployment ranks."

Obama has visited the northern Indiana county four times — twice during the 2008 campaign and twice since — focusing attention on the area as emblematic of the nation's double-digit unemployment woes.

Now, hope is rising in the struggling area as people head back to work — though not always at the same jobs they left, and sometimes for less money.

The unemployment rate here, driven by job cuts at factories that made Elkhart County the capital of recreational vehicle manufacturing, spiked in March to 18.9 percent. But it has fallen steadily since, reaching 14.5 percent in November while the national rate climbed to 10 percent.

Part of the drop in unemployment may be due to hiring at a handful of RV makers like Heartland RV in Elkhart, which recently held a job fair after announcing it would add 400 jobs by March. For jobless workers who have spent months scrimping to keep up with mortgages, the job fair was a welcome first step in returning to the life they used to know.

"Unemployment is livable, but it's not like how we were living," said Marcia Blanton, who lost her job at RV maker Monaco Coach in September 2008. Blanton, 53, of Elkhart, briefly landed a job at a musical instrument factory before being laid off again a year later. She was still waiting to hear from Heartland about her application weeks later.

Other RV makers also have begun hiring, albeit slowly, as orders from dealers have picked up in the past few months. Dealers don't generally discuss sales figures, but two economists who follow the industry have predicted a slight rebound in production for 2010.

Gulf Stream Coach and Electric Motors Corp. announced in May they plan to spend more than $80 million on building renovations and equipment for factories in Wakarusa and Nappanee. The companies estimate the project could have 1,600 workers by 2012.

"I don't think there's any question that jobs are up," said Morton Marcus, a retired Indiana University economist who recently conducted a study for the Elkhart County Economic Development Corporation that forecast an upswing in the RV industry.

Still, some of those who have gone back to work are making less money.

Doug Hartzell, 59, of Nappanee, was rehired as a temp worker at the new Monaco RV in September after the old company's assets were bought by Navistar International Corp.

"I really did make an effort to find a job in those 12 months I was off and it was kind of discouraging after a while when you go door to door and you don't even get a chance for an interview," he said.

He said he's fine with working 9 1/2- to 10-hour days, even for the smaller paycheck.

"I'm just glad to have a job," he said.

More jobs could be on the way in other industries as well.

Band instruments, office furniture, steel tubing, plastics and agricultural testing supplies are also made in Elkhart County.

Dorinda Heiden-Guss, president of the county development corporation, said the county has seen an "onslaught" of business interest since visits from Obama and former Arkansas Gov.-turned-Fox News commentator Mike Huckabee.

"People seem to know about Elkhart County," Heiden-Guss said.

In the past year, about $134 million worth of new projects entailing 3,300 new jobs have been announced, she said.

Upstart Electric Motors Corp. has moved into a former RV showroom in Wakarusa, where CEO Wil Cashen hopes to hire hundreds of workers to produce drive trains for electric-hybrid vehicles. Companies like Gulf Stream would install the engines. It's one of three electric vehicle projects involved in or eyeing the county.

Profitability will take some time — Electric Motors' business plan projects million-dollar losses for the first two years before turning a $21 million profit in 2011.

Still, Cashen, a northern Indiana native, is a big believer in Elkhart County and its down-to-earth work force.

He was so taken with Neufeldt's speech introducing Obama in Wakarusa that he hired him as a company spokesman. There isn't much speaking to do right now, so Neufeldt does odd jobs around the mostly empty building and the nearby Nicola Tesla School of Technology, where Cashen intends for employees to be retrained to work with electric motors.

"Elkhart is a kind of a sleeping diamond," he said. "It's an absolute diamond in the rough."

Amid the signs of hope, there are still plenty of reality checks.

Thousands remain out of work — nearly 14,000 in the Elkhart-Goshen metropolitan area alone in November. Social services agencies like Church Community Services, a food pantry near downtown Elkhart that serves 2,000 families a month, say they're still seeing intense need.

"We haven't seen the bottom yet," director Dean Preheim-Bartel said.

But despite lingering skepticism among some in Elkhart County, many believe that this poster child for the recession will one day become a symbol of recovery.

"If it's going to happen, I think we're going to be the first to see it happen," said Heiden-Guss, the president of the economic development corporation.

Fed Up with Federalism: U.S. Commitment to States' Rights is Undermining the Economic Recovery

In the December 2, 2009 American Prospect article "Fed Up With Federalism," Harold Meyerson explains "how America's commitment to states' rights is undermining our economic recovery."

By accident of its birth -- a collection of separate colonies that slowly came together to form an independent union and revolted against the remote power of the British government -- the United States has an enduring bias toward localism, an aversion to centralized government that is part of its DNA. For some on the left, this has been seen as a positive. "It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country," Justice Louis Brandeis once wrote.

Even though progressives such as Brandeis have celebrated our federalism, it's important to remember that Brandeis lived and worked at a time when the federal government was icebound in conservative orthodoxy and the cause of social justice could be advanced only in a small number of states and cities. Segregationists like George Wallace and Richard Russell have celebrated our federalism, too, arguing for states' rights at a time when the national government was moving to abolish the Jim Crow laws throughout the South.

Conversely, liberals have argued for the right of the nation to move beyond its federalist constraints during those periods when they controlled the national government (the 1930s and, especially, the 1960s). And during the late, lamentable Bush presidency, conservative justices on the Supreme Court frequently forbade the states from enacting stricter regulations on business than those that Bush's administration had put in place.

The love of federalism is a sometime thing; its critics and champions switch places depending on who is in power at which level of government. But the problem with our allegedly ingenious federal system is not simply that half the time, if not more, it is an effective way to protect all that is biased and unfair in the American nation. The problem is also that federalism inherently subverts a coherent national response to many fundamental challenges the United States faces, at a time when other major nations -- our competitors in an increasingly global economy -- face no such structural impediment.

Given the sheer size of America and the distinct cultural identity of its many regions, federalism has always made a certain amount of sense. The abolition of the slave trade and the legalization of gay marriage had to begin somewhere. As the rise of national government, transportation, and media have eroded regional identities, traditions, and isolation, however, more conservatives than liberals have found a refuge in federalism.

But even though federalism is more often the refuge of reactionaries than of visionaries, it has an even deeper flaw: setting the nation at cross-purposes with itself, and never more so than during a recession.

***
There is a classic algebra problem in which water pours into a bathtub from the tap at a specified rate but also exits the tub at a different rate because someone has neglected to stop the drain. If you know the rates, you should be able to figure when the water will rise to a certain level. During a recession, the United States becomes a version of that bathtub. The federal government is the tap. The state and local governments are the drain.

That's no way to fight a recession. When investment, production, and consumption are all in decline, the only way to keep the economy from shrinking is for the federal government to deficit spend and create a stimulus. But while the federal government pours money in, the state and local governments, which cannot deficit spend, see their tax revenue shrinking, so they cut spending, raise taxes, or both -- taking money out of the economy. America's distinct brand of federalism inherently impedes an economic recovery.

Consider the state with the biggest tap and the biggest drain: California. The sum total of the federal tax cuts for Californians included in last year's Bush administration stimulus legislation and this year's Obama administration stimulus came to $15.5 billion for the years 2008 to 2010 -- money desperately needed to boost consumer spending in the midst of the worst downturn since the Depression, says Jean Ross, executive director of the California Budget Project. But the sum total of state tax increases enacted by the California Legislature and signed into law by Gov. Arnold Schwarzenegger in 2008 and 2009, Ross says, came to $12.5 billion for the years 2008 to 2010 -- money desperately needed to keep public services in California from grinding to a halt in the midst of the worst downturn since the Depression. "The state negated 80 percent of the feds' tax cut," Ross says. "And the cuts and the increases pretty much targeted the same lower-income groups."

Nor were the negations limited to tax cuts. Ross calculates the federal government's direct aid to education, its block-grant programs and other education-related expenditures for California total $9.5 billion from 2008 to 2010. The state government's cuts to K-12 schools, community colleges, the California State University, and the University of California add up to $17.4 billion for the same years.

California leads the fiscal--disaster pack, but it is anything but alone. A September paper from the Center on Budget and Policy Priorities reports that since the recession began, at least 41 states and the District of Columbia have slashed their budgets for a wide range of services -- 27 for health care, 25 for aid to the elderly and disabled, 26 for K-12 education, 34 for higher education, and some states for all of these. Forty-two states have reduced wages to state workers through layoffs, furloughs, and salary cuts. At least 30 states have raised taxes during the same period. "All of these steps remove demand from the economy," the center concludes. They "reduce the purchasing power of workers' families, which in turn affects local businesses."

Without the Obama stimulus, which appropriated roughly $140 billion to the states to reduce their budgetary shortfalls during 2009 and 2010, these numbers would be even worse -- though keep in mind that $140 billion in federal funds isn't engendering growth; it's merely offsetting state cutbacks. The center estimates that the federal bailout enabled states to reduce their budget gaps by 40 percent. But with state financial shortfalls in those two years coming to a whopping $350 billion, that leaves $210 billion in unrecompensed state budget shortfalls, which the states have to make up by cutbacks or tax hikes or financial gimmicks. Dean Baker and Rivka Deutsch of the Center for Economic and Policy Research estimate that the cutbacks and tax hikes of cities, counties, and school districts in 2009 and 2010 will come to an additional $15 billion.

So how much does the government's stimulus come to when we subtract the amount the states and localities are taking out of the economy from the amount the feds are putting in? The two-year Obama stimulus amounted to $787 billion, of which $70 billion was really just the usual taxpayers' annual exemption from the alternative minimum tax, and $146 billion was actually appropriated for the years 2011 to 2019. That leaves $571 billion that the federal government is pumping into the economy during 2009 and 2010. Subtract the amount that state and local governments are withdrawing from the economy (they have a combined shortfall of around $365 billion, but let's say they do enough fiscal finagling so that the total of their cutbacks and tax hikes is just $325 billion), and we're left with $246 billion.

At $787 billion, the stimulus came to 2.6 percent of the nation's gross domestic product for 2009 and 2010 -- not big enough, but a respectable figure. At $246 billion -- the net of the federal stimulus minus the state and local anti-stimulus -- it comes to just 0.8 percent of GDP, a level lower than those of many of the nations that the U.S. chastised for failing to stimulate their economies sufficiently.

But other major nations don't have federal systems that turn them into unstopped bathtubs in times of recession. They have states and municipalities, to be sure, but either the responsibility for funding most functions of government resides with the national government, or, as in Japan, state and local governments are not required to run annual balanced budgets. In China, which probably has had the most robust recovery of any major nation, taxes and spending for everything are set in Beijing (including the lower tax rates for provinces in which manufacturing for export is the main economic activity). In France, taxing and spending has been controlled by the national government at least as far back as Louis XIV. In Britain, funding for local government also comes from the national government; "local taxation," says Thomas Barry, first secretary for economic affairs in the British Embassy in Washington, D.C., "is a very small fraction of the total tax burden in the U.K."

Such is obviously not the case in the U.S. The national government alone funds defense and the two great social programs, Social Security and Medicare, created at moments (1935 and 1965) when liberals controlled both Congress and the White House. But state and local governments, which can't run deficits, remain the primary funders of education, transportation, local infrastructure, and public safety and split the cost of health care for the poor with the feds. What this means is that the governmental impediments the United States encounters during a recession are far greater than those encountered by the other major nations with which we compete in the ever more global economy. What this means is that our federal system is, in this very significant particular, massively dysfunctional.

***
This September, the Los Angeles County Metropolitan Transportation Authority, the agency that runs LA's growing subway system and its far-flung bus lines, struck a novel deal with an Italian rail manufacturer. In return for its purchase of 100 light-rail cars from the company, the MTA got the company to agree to locate a unionized factory in Los Angeles. Problems with the manufacturer caused the deal to collapse, though, and the MTA is now searching for another company that will build the trains in Los Angeles. The agency's attempt to bolster local industry with a Buy-LA policy has encountered opposition, however, from the Los Angeles Times, which noted in an editorial that federal funds available for buying clean, green rail transport are denied to states and cities that insist on making the product locally. To be sure, the Obama administration has allotted billions of dollars to incubate an electric-car industry. But it is not insisting on domestic content, nor has it cut a deal with a foreign manufacturer to locate a factory here, as Los Angeles is trying to do with rails and as Southern states have done for years with foreign automakers.

The federal government doesn't do that. Well, our federal government doesn't do that. Foreign federal governments do that all the time. China has spared no expense to attract foreign manufacturers, routinely abating their taxes, holding wages in check, offering help to construct new facilities. In the U.S., states and cities woo foreign and domestic investors with an array of tax and zoning incentives; right-to-work states promise to hold down wages, too. But the kinds of sweeping guarantees that national governments can offer are beyond the capacity of states and localities to promise, much less deliver.

China, for instance, is halfway through a stunningly ambitious project to build 100 university science parks roughly modeled on North Carolina's fabled Research Triangle. On average, the parks, according to the testimony of attorney Alan Wolff to the U.S.?China Commission, are 150 percent the size of North Carolina's triangle. "China has taken our model and expanded dramatically on it," Rick Weddle, CEO of the Research Triangle Foundation, testified to the commission. "We toured a research park in Suzhou that is a joint venture between the Chinese government and Singapore. We wouldn't even think about that."

The industrial policies of American states are dwarfed by those of foreign nations, while the one entity with the resources to compete with foreign nations -- the federal government -- stays out of the game. States seek new factories while the federal government shuns domestic content requirements. As with stimulus policy during recessions, state and federal industrial policies seem totally at cross-purposes.

Federalism also enables federal and state governments to punt the responsibility for funding politically contentious programs to each other -- a pretty good way of ensuring that the programs will end up underfunded. A quick way to grasp the contrasting levels of political power wielded by the elderly (considerable) and the poor (negligible), for instance, is to look at how the government funds their health care. Medicare, for seniors, is entirely federally funded. Medicaid, for the poor, has the responsibility for its funding split between the federal government and the states. Despite the fact that Medicaid is nominally a national program, the levels of financial support that states allot it vary considerably. During the current recession, many states have opted to slash Medicaid benefits, even as federal Medicare benefits have largely stayed intact.

The perverse consequences of this hybrid funding have seldom been clearer than during the health-care reform battle, in which the Senate Finance Committee's bill to open Medicaid rolls to more Americans without pledging full federal funding for the program has presented recession-wracked states with a problem they could do without. After Gov. Schwarzenegger stated that the increased cost to his state could amount to $8 billion annually, Sen. Dianne Feinstein of California, who backs the health-reform efforts, announced that she couldn't support a bill that increased the state's costs. (In the House bill, the federal government picks up almost all of the states' increased Medicaid costs.) Federal mandates on states that must balance their budgets during recessions are problematic policy, and they illustrate the buck-passing that is inherent in the federal system. Historically, the price for this feature of federalism has been paid neither by the federal nor state governments but by the poor.

In regulatory matters, the gap between federal and state standards can work as Brandeis thought it should, but it can also enable businesses to comparison shop for the lowest level of regulations. While federalism is an effective way to create multiple governmental power centers in a nation, it creates a system that powerful private players can game. The diffusion of power inherent in federalism works best when power in the private economy and civil society is also diffused, so that, for instance, business will get push-back from labor when it attempts to arbitrage the gaps between state and federal law.

The boundary between federal and state functions in the United States has always been a flexible one, and one that has moved slowly and haltingly toward the federal level throughout most of the nation's history. By the standards of nearly every other major nation, however, and increasingly by the standard of common sense, the United States retains a system of government that frequently subverts its own policies and enables federal and state governments to negate each other's endeavors. Federalism has its points, but in a growing number of ways, and especially during a recession, it makes no damn sense at all.

Fed says economy perked up from depressed levels

In the October 21, 2009 Reuters article "Fed says economy perked up from depressed levels," Emily Kaiser says the economy is improving in most parts of the United States.

WASHINGTON (Reuters) – U.S. economic conditions stabilized or improved modestly in most parts of the country, according to a Federal Reserve report on Wednesday that suggested the economy was slowly clawing out of a recession.

In its "Beige Book" of anecdotal reports on the economy, the Fed noted improvement in two of the hardest hit areas -- residential real estate and manufacturing.

"Reports from the 12 Federal Reserve districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels," the Fed said in its report, which was prepared at the Federal Reserve Bank of Richmond based on information collected before October 13.

"Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered."

U.S. stocks stayed at higher levels after the report was released, while prices for government debt remained lower, as did the U.S. dollar.

Jennifer Lee, an economist with BMO Capital Markets, said the tone of the Fed's report was "tentatively" more positive than the prior one, which was released on September 9.

"Not super-duper-jumping-up-and-down-with-great-excitement positive, but slightly more optimistic than seen in recent reports," she said.

The central bank gave a grim assessment of commercial real estate, which is widely seen as one of the big remaining trouble spots for the still-struggling financial sector.

"The weakest sector was commercial real estate, with conditions described as either weak or deteriorating across all districts," the Fed said.

A number of the regional Fed banks said businesses in their area did not expect commercial real estate to improve much, if at all in, in 2010.

"Tenants are demanding significant concessions -- including space improvements and one- to two-year leasing commitments -- along with low rental rates," the Boston Fed reported.

THOSE WALL STREET BONUSES

Labor markets were typically characterized as weak or mixed, although there were "occasional pockets of improvement." That assessment supported the view that the worst of the job losses are over, but it may be a while before growth resumes.

The Atlanta Fed said many employers "indicated that they were holding on to the most skilled workers, but have reduced overall hours. They feel that a sustained increase in orders and sales is a prerequisite to adding to payrolls."

Despite all the recent talk about huge bonuses at Wall Street firms, the New York Fed heard from one of its contacts that times were getting tougher for top-tier bankers.

"Compensation -- especially cash compensation -- has reportedly fallen sharply, and is expected to fall further during the remainder of the year and into 2010, most notably for the top earners in the industry," the New York Fed said.

The report said the "cash for clunkers" auto sales incentive program left depleted inventories and slower sales in its wake. Overall spending remained weak in most districts, although "some improvements" were noted.

In residential real estate, which was at the heart of the credit crisis that sparked the recession, the government's $8,000 first-time homebuyers' tax credit helped to lift sales of low- to middle-priced houses, the Fed said. However, residential construction activity remained weak in most districts.

Measures of discretionary and business spending were a mixed bag. In New York City, retail sales showed improvement, particularly for one unnamed higher-end department store.

Broadway theaters report that attendance picked up somewhat in September and early October but remained slightly lower than a year earlier.

In North Carolina, a contact on the Outer Banks, a popular vacation spot, indicated that bookings for the Columbus Day holiday weekend were somewhat stronger than a year ago, which she attributed to "visitors being a little more positive."

And in the Boston Fed's region, business travel was especially soft, and one contact worried that decreased corporate travel and spending will become "the new norm."

AP analysis: Signs of recovery in some US areas

In the October 5, 2009 article "AP analysis: Signs of recovery in some US areas," Associated Press writers Christopher Rugaber and Mike Schneider report that "signs of fitful recovery emerge in some areas, ... but gains may be fleeting."

WASHINGTON (AP) -- Signs of a slow and fitful recovery emerged in August in some communities across the country where unemployment dropped and foreclosures stabilized, according to The Associated Press' monthly analysis of economic stress in more than 3,100 U.S. counties.

The average county stress score fell slightly, and fewer counties qualified as economically distressed.

But those glimmers of hope are providing scant benefit for most people suffering from the recession. Some of the statistical improvements in employment were inflated by seasonal jobs, workers who quit the labor force and temporary federal stimulus money.

"It's pretty clear that even though the recession likely has ended, not too many people are likely going to be humming that Bobby McFerrin tune, 'Don't Worry, Be Happy,'" said Sean Snaith, an economist at the University of Central Florida.

The latest results of the AP's Economic Stress Index showed the pain easing in some of the nation's hardest hit areas, such as Elkhart, Ind., and pockets of the Carolinas. But foreclosure hotbeds in metro Las Vegas and South Florida continued to suffer.

The AP calculates a score from 1 to 100 based on a county's unemployment, foreclosure and bankruptcy rates. Under a rough rule of thumb, a county is considered stressed when its score exceeds 11. The average county's Stress score dipped to 10.3 in August, from 10.54 in July, the first drop in three months. In August 2008, it was 6.94.

About 39 percent of counties had a score of 11 or higher in August, compared with 41 percent in both June and July. That's still up substantially from a year ago, when only 6.6 percent of counties had scores above 11.

As in previous months, Nevada (21.32), Michigan (17.59) and California (16.31) topped the list of the most economically stressed states. North Dakota (4.67), South Dakota (5.3) and Nebraska (5.79) were at the bottom.

The most stressed counties were Imperial County, Calif. (31.83); Yuma County, Ariz. (27.58); Merced County, Calif. (24.28); Lyon County, Nev. (24.02); and Lauderdale, Tenn. (23.56). Imperial and Yuma are agricultural areas with high seasonal unemployment.

The states that showed the most improvement in their stress scores were Colorado, South Carolina, North Carolina and Virginia. All four saw their jobless rates fall.

The states with the biggest year-to-year increases in economic stress in August were Nevada, Oregon and Michigan.

Prince William County, Va., was among the five counties with most improved foreclosure rates over the past year. And Caroline County, Va., was among the five with the best improvement in the past month.

Colorado's stress score fell to 9.96 in August, from 10.47 in July, as its unemployment rate dropped to 7.3 percent from 7.8 percent. But the decline in its unemployment rate was due mainly to a drop in the state's labor force, not to the creation of new jobs, said Tucker Hart Adams of the Adams Group, an economic consulting firm based in Colorado Springs, Co.

When unemployed people give up on their job searches, they are no longer counted in the unemployment rate.

Overall, Colorado's economy is still struggling, Adams said.

"You can go to the mall and fire a cannon and not disturb anyone," she said.

In Cherry Creek, a high-end shopping strip in Denver, there is "lots of empty space" among the storefronts, Adams added.

A trend of frustrated people giving up on job hunting is also evident in North and South Carolina and Virginia, analysts said. The pattern surfaced in national data Friday, when the Labor Department reported that nearly 600,000 people stopped looking for jobs last month.

Some positive signs emerged in the mid-Atlantic, though. A survey by the Federal Reserve Bank of Richmond last month found that the region's manufacturers hired more workers in September, for the first time since December 2007. That was up from no change in August and a decline in July.

During the late spring and summer from May to August, pain eased slightly for some of the nation's most stressed areas. Deschutes County, home to Bend, Ore., had been among the 40 most stressed counties in May. But in August, it saw its unemployment dip and its foreclosure rate hold steady.

Much of that relief came from seasonal jobs in landscaping and manufacturing of wood products. And it was limited mainly to blue-collar seasonal workers -- not the engineers, planners, architects or designers who lost their jobs when Bend's once-thriving housing market cooled off.

"We didn't add enough full-time jobs for us to turn that corner," said Carolyn Eagan, a regional economist for the state of Oregon. "That's what we need right now."

The unemployment rate in the Elkhart, Ind., area, meanwhile, fell to 16 percent from 16.8 percent. Elkhart, hit hard by layoffs in the RV industry, had suffered some of the largest jumps in unemployment earlier this year. The city has been visited twice by President Barack Obama.

Though a drop in the labor force played a role in lowering the rate, better news arrived last month: Two companies announced they would create about 200 manufacturing jobs in the area.

"They are no longer falling off a cliff," said Jimmy Jean, a regional economist at Moody's Economist.com.

Jobs and manufacturing data suggest slow recovery

In the October 1, 2009 article "Jobs and manufacturing data suggest slow recovery," Associated Press economics writer Martin Crutsinger reports that the "US economic recovery looks weak as data on jobs, incomes and manufacturing miss expectations."

WASHINGTON (AP) -- The U.S. economy is having growing pains.

Discouraging new reports on unemployment and manufacturing Thursday reinforced worries that job losses and meager factory output will make for a weak recovery as the nation climbs out of the worst recession in decades.

Stocks tumbled in response. The Dow Jones industrial average had its worst day since early summer, falling 203 points to 9,509. Just last week, it was within shouting distance of 10,000.

"The economy is not moving quickly from recession to expansion. It is moving in a very halting way," said Mark Zandi, chief economist at Moody's Economy.com. "Given the severity of the downturn, we are not going to come roaring back."

First-time jobless claims rose more than expected last week to a seasonally adjusted 551,000, the Labor Department said. Economists viewed it as a sign that employers remain reluctant to hire.

Economists think the economy lost 180,000 more jobs in September. The unemployment rate is expected to climb from 9.7 percent to 9.8 when the government releases its monthly jobs report Friday.

And factories are struggling to mount a rebound. A gauge of manufacturing activity came in at 52.6 for September, the Institute for Supply Management said -- enough to signal growth for the second straight month but still down from August.

The gloom on Wall Street to start the fourth quarter came despite encouraging signals on consumer spending and construction.

Construction spending rose 0.8 percent in August, including the biggest increase in housing activity in nearly 16 years. But spending for office buildings, hotels, shopping centers and government projects all declined.

Consumer spending rose a bigger-than-expected 1.3 percent in August, the best gain since October 2001, when the country was recovering from the Sept. 11 terrorist attacks. But about a third of that increase came from the government's Cash for Clunkers program.

Once the trade-in program ended, car sales fell back. General Motors and Chrysler said Thursday that their sales fell more than 40 percent in September. Ford reported a 5.1 percent drop.

The August spending report showed personal incomes continue to lag: They edged up 0.2 percent, helped by an increase in the minimum wage that took effect in July.

Economists fear weak income growth means that the jump in consumer spending won't last. Consumer spending is vital for a sustained recovery because it accounts for about 70 percent of all economic activity.

The jump in spending and the much smaller gain in income sent the personal savings rate down to 3 percent in August, from 4 percent in July. Analysts think Americans will keep saving more in the months ahead, trying to rebuild their nest eggs.

Many economists believe the economy is growing again after the longest recession since World War II -- perhaps at a rate of 3 percent or more in the just-ended third quarter.

But David Wyss, chief economist for Standard & Poor's in New York, said he expects growth to slip to an anemic 0.8 percent in the final three months of this year, and perform only a little better next year.

"The good news is that it will be positive, but it will not be a barnburner," he said.

Weak growth like that would not be strong enough to bring down the unemployment rate. Wyss predicts it will peak at 10.4 percent around the middle of next year. The recession has already eliminated almost 7 million jobs.

Those losses are weighing on Americans as they struggle to pare debt and build up savings accounts decimated by the stock market slide. And tighter lending has made spending difficult even for people who want to shop.

"With all that is going on, this is going to be a subdued rebound -- two steps forward and one step backward," said Sal Guatieri, an economist with BMO Capital Markets.

The rise in jobless claims last week came after three weeks of declines. The four-week average, which smooths out fluctuations, dropped to 548,000. That's well below the peak, in early April, but signals a weak labor market.

Unemployed workers are having a hard time finding new jobs. The number of people continuing to collect unemployment benefits fell by 70,000 last week to the lowest level since April, but there were 6.1 million still on the jobless rolls.

When federal emergency programs are included, almost 9 million people were getting jobless benefits in the week that ended Sept. 12. That's little changed from the previous week.

Congress has already added as much as a year of extra benefits on top of the roughly six months provided by most states. Congress is considering extending benefits even further, but the Senate plan was being slowed Thursday by some lawmakers upset that their states would be left out.

Turning Point for the Global Recession?

In the September 3, 2009 TIME article "Turning Point for the Global Recession?," Michael Schuman explains that the world may be on its way to economic recovery, but it will never be the same:

Economic crises never happen overnight. They are the result of years, even decades, of global economic change, policy errors and investor misjudgment. But there always seems to be that one moment — the Wall Street crash of 1929, the fall of the Thai baht in 1997 — when long-simmering trends coalesce to cause a dramatic loss of confidence. For what has turned out to be the worst recession in 70 years, that moment came on Sept. 15, 2008, when Lehman Brothers filed for bankruptcy and bankers around the world asked that most lethal of questions for world financial stability: If a bank as well known as Lehman can fail, who is safe? And off we went, spiraling with head-swimming speed into recession.

As terrified bankers refused to lend, global economic activity hit a wall. Ships lay idle as trade fell to a trickle. Protests erupted in Reykjavík as Iceland tumbled into bankruptcy. Even mighty China shuddered with fears of mass unrest as millions of workers were tossed from jobs at shuttered export factories. And as policy became alphabetized, with predictions that the recession would resemble a U, V or W, some worried the global economy would mimic the letter L — an interminably protracted period of meager or no growth much like the one that has plagued Japan for nearly 20 years. (See pictures of the global financial crisis.)

That hasn't happened, and one year after the Lehman bankruptcy, as policymakers and pundits gather to take stock — the summer meeting of the World Economic Forum opens in Dalian, China, on Sept. 10 — it appears less and less likely that it will. Yes, economic conditions remain miserable. The International Monetary Fund predicts the world economy will contract 1.4% this year, the worst performance since the end of World War II. But everywhere economists can point to what they call "green shoots" sprouting in the gloom. Japan, Germany and France emerged from recession in the past quarter, and economists are busily upping forecasts for U.S. growth. After a brief pause, China has returned to its caffeinated growth path, lifting much of Asia with it. "The worst-case scenario of a complete economic and financial meltdown has clearly been avoided," says Julian Jessop, chief international economist at consulting firm Capital Economics in London. Jim O'Neill, chief economist at Goldman Sachs, proclaims: "We're out of recession globally."

Yet even if a recovery is on track, this recession will not be like most others, when what went down simply came back up. The downturn is having a fundamental impact on the globe's economic future. The world after the Great Recession won't be the world that existed before.

Perhaps most importantly, the recession has altered the role of the U.S. in the world economy. For decades, the U.S. consumer has been the primary driver of global growth. The inherent dangers of such dependence on one source had long been obvious, and now that the financial crisis has finally reined in debt-gorged Americans, the world has launched a quest to find replacements. To turn its citizens from savers to spenders, China doled out subsidies to buy cars and appliances and revved up efforts to construct a stronger social safety net. In Taiwan, where the export-oriented economy was among the worst hit, the government is promoting new domestically focused industries like tourism. "We were hard-hit by the shrinkage of the export market in the U.S.," Taiwan President Ma Ying-jeou told TIME. "So one lesson we learned is we should diversify our export markets."

The effort is showing signs of success. Asia is leading the way out of recession, with the help of the pocketbooks of its own consumers. The region's three largest countries — China, India and Indonesia — have remained buoyant through the downturn due in great part to domestic demand. The spending power of Asia's newly rich has stimulated the beginnings of a recovery throughout the continent. Continuing that trend has become a matter of official policy; India, for example, inked free-trade agreements with South Korea and the Association of Southeast Asian Nations in August. It is not fanciful to think that Asia is on its way to becoming a self-propelling trade bloc, decoupled from the U.S.

Yet questions remain about whether there has been enough change to set the recovery on a truly sustainable course. Stephen Roach, chairman of Morgan Stanley Asia, worries the giant imbalances that contributed to the crisis — excessive debt and deficits in the U.S. matched by excessive savings elsewhere — are still a danger to the world economy. Policies aimed at supporting growth, such as Washington's Cash for Clunkers initiative, says Roach, may only perpetuate those imbalances by reinforcing America's unhealthy consumerism and the world's reliance on it. "We've stopped the bleeding, but it is not clear to me that we're moving back to significant improvement in the underlying health of the global economy," he says. "Unless the world comes up with more than one consumer, the recovery is going to be anemic."

Such uncertainty about the true nature of the recovery underlines the next big challenge: How can policymakers nurture the nascent revival while mitigating the dangers of doing so? The only way the world avoided a more severe recession, even a depression, was the unprecedented intervention of governments and central banks — the near-zero interest rates, bank rescues, fiscal-stimulus programs and, in some cases, industrial bailouts. But such government action, if maintained for too long, can lead to asset-price bubbles and other destabilizing evils. Close the spigot too quickly, though, and the recession — think the letter W — could return. (See pictures of the Top 10 scared traders.)

That possibility makes unwinding state stimulus measures a tricky game. The conundrum is most advanced in China. As growth returns, the easy money that has lifted the economy might encourage a dangerous escalation in property prices while undercutting banks' balance sheets. But any rumor of tightening sends Shanghai stocks into a tailspin.

Even when the era of big stimulus comes to a close, the reign of big government is unlikely to end with it. The world economy hasn't experienced such a heavy government hand since the 1970s; the recession has reopened the debate over the appropriate roles for the state and market in a modern economy. In Dalian, and again at the next G-20 meeting in Pittsburgh, Pa., there will be much talk of overhauling the world financial system to prevent a meltdown from happening again.

Yet before we worry about the next downturn, we still have to get through this one. The world economy may be over the worst, but we're still far from where we were before the crisis. The U.S. has lost 6.7 million payroll jobs since December 2007. "It'll take a long, long time to make up all the economic activity that was lost during the recession," says Jessop of Capital Economics. One year after the fall of Lehman, the best the world can collectively do is keep all fingers tightly crossed.

Hints of Recovery Elusive to Many Job Seekers

Hints of Recovery Elusive to Many Job Seekers
(10-minute video from PBS).
Despite talk of an imminent economic recovery, millions of Americans are still struggling to find work. Paul Solman visits a job fair to learn more about how job seekers are coping with long-term unemployment.

Sale of big-ticket items soar, bolstering economy

As explained in an earlier post that compares macroeconomic policy to the story of Goldilocks and the Three Bears, the key to managing the economy is influencing overall spending on newly produced goods and services. The largest component of this aggregate demand (AD) is consumption spending. According to the August 26, 2009 article "Sale of big-ticket items soar, bolstering economy," Associated Press business writer Alan Zibel reports that spending increased significantly in July, which may indicate that the current economic recession is close to an end:

Consumers and business spend big in July, sending home, equipment and car sales soaring

WASHINGTON (AP) -- Consumers and businesses went on a big-ticket spending spree in July, sending home, car and equipment sales soaring by the largest amount in years.

The sales, detailed in two government reports Wednesday, confirmed a subtle but marked shift in confidence about the economy. New home sales jumped almost 10 percent from June, while orders for long-lasting goods like appliances, planes and computers rose nearly 5 percent in July, the third increase in the past four months.

"It looks like we've hit bottom and we're now slowly trying to dig our way out," said Nigel Gault, chief U.S. economist at IHS Global Insight.

Still, it remains unclear whether the growth can be sustained. Though the increases in housing sales and manufacturing last month were dramatic, they came from extraordinarily low levels and were fueled by temporary government programs like Cash for Clunkers and tax credits for home sales.

Most economists now agree the recession that began in December 2007 has ended or is ending. Some say the economy is poised to grow strongly in the July-September quarter, but will probably show weaker growth after government stimulus spending tapers off.

Sales of new homes surged to a seasonally adjusted pace of 433,000 in July from 395,000 in June, the Commerce Department said, providing another sign the housing market is bouncing back from the historic bottom reached early this year. Driven by falling prices, the fourth-straight monthly increase was greater than expected. Sales haven't risen so dramatically since February 2005.

While sales are still off nearly 70 percent from the frenzied peak four years ago, they are still up more than 30 percent from the bottom in January -- a big relief after a long and painful decline.

"We can stop worrying about the housing market and start playing closer attention to other issues, such as when credit will start flowing more freely," Joel Naroff, chief economist at Naroff Economic Advisors, wrote in a note to clients.

The improved outlook could help further boost the economy. As home sales rise, builders will gradually need to hire more workers to pour foundations and pave roads, reversing the trend that saw 1.4 million industry jobs shed since the recession began.

"These are crucial elements of a sustainable recovery," David Resler, chief economist at Nomura Securities, wrote in a research note.

Construction job losses have slowed recently, with 76,000 lost in July, about half January's level.

Much like Cash for Clunkers, homebuyers are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify.

And there are many deals to be had: The median sales price of $210,100 was 11.5 percent lower than levels a year ago, but still up from March's low of $205,100.

Builders and real estate agents fear that the end of the tax credit could reverse the upward trend. Sen. Johnny Isakson, R-Ga., has introduced legislation to extend it for another year, raise it to $15,000 and make it available to all buyers.

If that doesn't happen, Isakson said in an interview, "the little improvement we have from awful to terrible will go away and it will go back to awful again."

Some builders are already seeing sales dip.

At A.F. Sterling Homes in Tucson, Ariz., sales fell in July because the builder said it couldn't guarantee the homes could be finished in time to qualify, said Randy Agron, the company's vice president.

"The real estate market is really a fragile thing," he said. "It's not the right time to take (the tax credit) away."

There were 271,000 new homes for sale at the end of July, down more than 3 percent from May. At the current sales pace, that represents 7.5 months of supply, which means builders have scaled back construction to the point where supply and demand are coming into balance.

A similar trend is happening in other industries across the economy.

Orders for transportation equipment, including cars, car parts and airplanes rose more than 18 percent, helping to drive the durable goods data.

A huge jump in aircraft orders accounted for most of that gain. Also, auto production improved last month as General Motors and Chrysler reopened many plants that were shut in May and June while the companies restructured and emerged from bankruptcy protection.

U.S. housing, confidence data point to recovery

According to the August 25, 2009 article "U.S. housing, confidence data point to recovery," Ros Krasny reports recent economic data suggest the current economic decline may be ending:

CHICAGO (Reuters) – Larger-than-expected gains in U.S. housing prices and consumer confidence on Tuesday lent new weight to views that the economy is emerging from the longest recession since the 1930s.

U.S. single-family home prices rose for the second month in a row in June, according to a closely watched index, and consumer confidence jumped in August.

In addition, President Barack Obama nominated Ben Bernanke to a second term as chairman of the Federal Reserve, removing some niggling doubt from investors' minds. The move promised a consistent approach to monetary policy in the years ahead.
The developments helped buffer the blow of projections for the U.S. budget deficit to reach its highest level in 2009, relative to the total economy, since World War Two.

"The recession appears to be over, with consumer attitudes lagging behind broad economic developments," said Steven Wood, chief economist at Insight Economics in Danville, California.

Major U.S. equities indexes closed higher after briefly hitting new 2009 highs on the day's events. Treasury bond prices initially fell as signs of a resurgent economy reduced interest in safer investments, but later rose after decent demand for an auction of two-year notes.

The Conference Board, an industry group, said consumer confidence climbed to a reading of 54.1 in August from 47.4 in July, handily beating forecasts, on an improved outlook for the job market and the overall economy.

The rise sent the index to its highest level since May. Still, some analysts warned not to get carried away.

"Confidence remains well below its historical average of 95 and it has not even regained the level of 61 seen before the collapse of Lehman almost a year ago," said Paul Dales, U.S. economist at Capital Economics in Toronto.

The weak labor market remains a sticking point to recovery, and especially a revival in consumer spending. Even the Fed has conceded the likelihood of a "jobless recovery," with the unemployment rate staying high long after growth resumes.

Americans saying that jobs were "hard to get" in August dropped to 45.1 percent from 48.5 percent but only 4.2 percent said jobs were plentiful.

"Most of the strength was in the 'expectations' component, so it looks like even though the near-term conditions are still a bit rocky, there is hope for the future," said Kim Rupert, managing director, global fixed income analysis, Action Economics LLC in San Francisco.

HOUSING PRICES IN BROAD-BASED GAINS

Other data supporting recovery hopes came from the Standard & Poor's/Case-Shiller housing price index. The housing market is considered a critical component to an economic recovery.

Prices of U.S. single family homes rose by 1.4 percent in June from May, after creeping up by 0.5 percent in April, suggesting the crippling housing slump is easing.

The Case-Shiller 10- and 20-city indexes have plunged by 54.3 percent and 45.3 percent, respectively, from their 2006 peaks.
June's improvement was broad based, with 18 of 20 metropolitan areas logging gains for the month.

"The most important take-away is the breadth of the rise," said Adam York, economist at Wells Fargo Securities in Charlotte, North Carolina. "The absolute worst is behind us."

Separately, the Federal Housing Finance Authority said U.S. home prices rose by 0.5 percent in June, according to its seasonally-adjusted monthly index, while prices fell by 0.7 percent in the second quarter.

"The S&P/Case-Shiller report dovetails with evidence from the FHFA house price index and the National Association of Realtors existing home sales report, suggesting that house price deflation has bottomed," said Anna Piretti, economist at BNP Paribas in New York.

BEN'S BACK

Bernanke's reappointment, while widely expected, was seen as a plus for markets that feared new uncertainty at a time the U.S. economic ship is finally righting itself.

Fed officials have warned that politicizing the U.S. central bank risked higher long-term interest rates as investors began to fear higher inflation taking root.

"Were Bernanke to be denied a second term in favor of, say, a current White House 'insider,' this would inevitably add to concerns about the blurring of lines between fiscal and monetary policy and the potential compromising of Fed independence," said strategists at analysis firm 4CAST Ltd.

For the time being, though, Bernanke & Company still face deflationary pressure from the huge "output gap" in the U.S. economy created by the deep recession.

"The news that the deflation-conscious Bernanke is going to be at the helm .... provides tentative support to our view that the zero-interest rate policy will remain in place until 2011 at the earliest," said Capital Economics' Dales.

The nonpartisan Congressional Budget Office (CBO) on Tuesday gave updated projections on the likely U.S. budget deficit in fiscal 2009 and beyond.

Spiraling deficit forecasts stretching far into the future have been cited as one element behind a dip in Obama's polling numbers, as Americans start to fear that tax hikes will almost inevitably follow.

The CBO forecast a fiscal 2009 deficit at $1.59 trillion, or 11.2 percent of projected gross domestic product, falling to $1.4 trillion or 9.6 percent of GDP in 2010.

It gave a 10-year deficit forecast of $7.14 trillion against $9.1 trillion.

Separately, the White House raised its forecast for the budget deficit between 2010 and 2019 to a total of about $9 trillion.

World Bankers Suggest Rebound May Be Under Way

In the August 22, 2009 New York Times article "World Bankers Suggest Rebound May Be Under Way" Edmund L. Andrews reports:

JACKSON HOLE, Wyo. — Central bankers from around the world expressed growing confidence on Friday that the worst of the financial crisis was over and that a global economic recovery was beginning to take shape.

“The prospects for a return to growth in the near term appear good,” declared Ben S. Bernanke, chairman of the Federal Reserve, offering optimism both about the United States and the worldwide outlook.

Though the Fed chairman repeated his warning that the economic recovery here was likely to be slow and arduous and that unemployment would remain high for another year, he went beyond the central bank’s most recent statement that economic activity was “leveling out.” Speaking to central bankers and economists at the Fed’s annual retreat here in the Grand Tetons, Mr. Bernanke echoed the growing relief among European and Asian central bankers that their own economies had already started to rebound.

Even as they indulged in a bit of self-congratulation over what had been achieved since the financial crisis of last year, these central bankers were beginning to focus quietly on another big task, how they will unwind the vast emergency measures they put in place to fight the crisis.

At almost the same time that Mr. Bernanke spoke, the National Association of Realtors reported that sales of existing homes jumped 7.2 percent in July — the biggest monthly increase in more than a decade and much bigger than analysts had expected.

Investors reacted ebulliently to both the housing news and to the Fed chairman’s remarks. The Dow Jones industrial average jumped as soon as the markets opened and ended the day up 155.91 points, or 1.67 percent, at 9505.96. Though stock prices are far below their record highs, the Dow has risen 45 percent from March and is at its highest point this year.

Shares of major home builders surged on the improvement in home sales, which was the fourth monthly increase in a row. While forecasters had expected a gain, the size of it jolted investors.

But stocks for a wide range of other companies climbed higher as well, as did the prices of oil, copper and gold. Shares climbed for industrial companies, energy producers and manufacturers of chemicals, plastics and other basic materials.

“This is a bull market,” said Laszlo Birinyi Jr., president of Birinyi Associates, who said he was investing in large banks, well-established technology companies like Apple and big industrial companies like 3M and United States Steel. “There’s just a desire to be in the market and hope that the train will again leave the station.”

Here in Jackson Hole, the mood of relief and cautious confidence among central bankers and economists on Friday was almost palpable — a stark contrast to the anxiety and tension that permeated their retreat here one year ago.

“It is reasonable to declare that the worst of the crisis is behind us, and that the first signs of global growth have appeared earlier than we generally expected nine months ago,” said Stanley Fischer, governor of the Bank of Israel and a top former official at the International Monetary Fund.

In the past week, France and Germany both surprised forecasters by reporting positive growth after a string of quarterly contractions. Japan followed with its own growth report.

The Fed and other central banks will have to unwind a number of emergency measures deployed during the peak of the crisis as growth returns.

A growing number of economists and some Fed officials say the shift to tighter monetary policies and higher interest rates, though unlikely to start until at least the middle of next year, may have to be much more abrupt than normal if they are to prevent inflation two or three years from now.

“When you get into a crisis like this, gradualism is not the right strategy,” said Frederic S. Mishkin, an economist at Columbia University who was a Fed governor from 2006 until 2008. “Of course, when things turn around, you have to be aggressive in the other direction.”

Indeed, the Federal Reserve’s “exit strategy” could lead to a clash with the Obama administration. The White House plans to release its newest budget estimates next week, and administration officials said that the 10-year deficit will rise to $9 trillion — a big jump from its earlier estimate of $7 trillion.

Some Fed officials are already worried about criticism that they are financing the government’s deficits by buying up long-term Treasury securities, and the central bank announced last week that it would end that program next month.

In the future, Fed officials could feel more pressure to further tighten monetary policy as a way of countering the government’s deficit spending. The immense amount of borrowing could push up long-term interest rates, if foreign investors balk at buying up United States debt.

Assessing the extraordinary events of the last year, Mr. Bernanke argued that aggressive action by countries around the world prevented a collapse that would have been even worse than what actually took place.

Asserting that short-term lending markets are functioning more normally, that corporate bond issuance is strong and that other “previously moribund” securitization markets are reviving, Mr. Bernanke said that both the United States and other major countries were poised for growth.

In emphasizing not just an imminent end to the recession but also good chances for actual growth, Mr. Bernanke’s assessment was in some ways surprising.

Despite encouraging signs on many fronts, American retailers have reported unexpectedly weak sales in the last week — a sign that that consumer spending could drag down economic growth in the months ahead. And on Thursday, the Labor Department reported that new unemployment claims jumped again.

And on Friday, a prominent banking analyst warned that hundreds more American banks would fail over the next year, adding to the difficulties that small businesses have experienced in routine borrowing.

“There will be over 300 bank closures,” Meredith Whitney, the Wall Street analyst who accurately predicted last year that Citigroup would have to cut its dividend, said in an interview with Bloomberg Television in Jackson Hole.

Jean-Claude Trichet, president of the European Central Bank, cautioned against assuming that the world was back to normal.

“We still have a lot of work to do,” he said, adding that “it would be a catastrophe” if governments failed to heed the lessons of the crisis and financial regulation.

Mr. Bernanke acknowledged that the banking system’s problems were far from over.

“Strains persist in many financial markets across the globe,” he cautioned. “Financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit.”

Bernanke optimistic economy will grow again soon

In the August 21, 2009 article "Bernanke optimistic economy will grow again soon" Associated Press economics writer Jeannine Aversa reports Ben Bernanke, the chairman of the Board of Governors of the Federal Reserve System, thinks the U.S. is on the cusp of economic recovery:

JACKSON, Wyo. – Federal Reserve Chairman Ben Bernanke on Friday offered his most optimistic outlook since the financial crisis struck, saying the economy is on the verge of growing again.

Speaking at an annual Fed conference, Bernanke acknowledged no missteps by the central bank in managing the worst crisis since the Great Depression. But he conceded that consumers and businesses are still having trouble getting loans, even though the financial system is gradually stabilizing.

Economic activity in both the U.S. and around the world seems to be leveling out, and the economy is likely to start growing again soon, Bernanke said in a speech at an annual Fed conference in Jackson.

The mood here was decidedly more hopeful than it was last summer, when a sense of foreboding hung over the forum just before the financial crisis erupted.

Bernanke's hopeful remarks on the economy contributed to a rally on Wall Street. The Dow Jones industrial average surged about 155 points, or 1.7 percent, and broader stock averages also gained sharply.

Despite his upbeat tone, Bernanke cautioned that the recovery is likely to be "relatively slow at first."

Unemployment, now at 9.4 percent, is widely expected to hit double digits later this year and to remain high for many months.

The financial markets have stabilized, and some businesses and consumers have found it easier to get loans. Still, the banking system has yet to return to normal, Bernanke said.

Financial institutions face further losses on soured investments. And many businesses and households still can't get the credit they need to fuel the economy, he said.

"Although we have avoided the worst, difficult challenges still lie ahead," Bernanke told the gathering of fellow bankers, academics and economists. "We must work together to build on the gains already made to secure a sustained economic recovery."

Reviewing the past year's crisis, Bernanke outlined the many emergency measures the Fed and other regulators took to help ward off a global financial meltdown. He declined to acknowledge critics' arguments that regulators failed to detect signs of the crisis before it occurred — or that Wall Street bailouts sent a message that big companies that make reckless bets would be rescued with taxpayer money.

A $700 billion taxpayer-funded bailout program to prop up financial institutions incensed many Americans. So did the repeated bailouts of AIG, which paid hefty bonuses to employees who worked in the division that brought down the firm.

Some analysts said Bernanke appeared to be angling to keep his job for another term.

"The lack of any mea culpa suggests the Fed chairman wants to be reappointed," said Richard Yamarone, economist at Argus Research. "When you go on an interview, you never speak of your shortcomings."

President Barack Obama will have to decide in coming months whether to reappoint or replace Bernanke, whose term expires early next year.

Ken Mayland, president of ClearView Economics, said Bernanke was engaging in a "bit of cheerleading to inspire confidence," especially among consumers whose caution could restrain the recovery.

Elsewhere at the conference, European Central Bank President Jean-Claude Trichet responded to a research paper on the origins and the nature of the financial crisis by saying he was a "little bit uneasy" about talk of a return to normalcy.

"We have an enormous amount of work to do, and we should be as active as possible," Trichet said.

The bulk of Bernanke's speech chronicled the extraordinary events of the past year.

Financial markets took a dizzying plunge starting in September and into October, nearly shutting down the flow of credit. The crisis felled storied Wall Street firms. The government took over mortgage giants Fannie Mae and Freddie Mac, as well as insurance titan American International Group Inc.

Lehman Brothers failed. It filed for bankruptcy on Sept. 15, the largest in corporate history, roiling markets worldwide.

The Fed swooped in with unprecedented emergency lending programs to fight the crisis. It eventually slashed a key bank lending rate to a record low near zero. And Congress enacted programs to stimulate the economy, including a $787 billion package of tax cuts and increased government spending.

"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major firms would have failed and the entire global financial system would have been at serious risk," Bernanke said.

Unlike in the 1930s, Washington policymakers this time acted aggressively and quickly to contain the crisis, said Bernanke, a scholar of the Great Depression.

"As severe as the economic impact has been, however, the outcome could have been decidedly worse," he said.
Global cooperation in battling the crisis was crucial, with central banks slashing interest rates and the U.S. and other governments delivering fiscal stimulus, he noted.

"The crisis, in turn, sparked a deep global recession, from which we are only now beginning to emerge," the Fed chief observed.

The conference, sponsored by the Federal Reserve Bank of Kansas City, draws a virtual who's who of the financial world — Bernanke's counterparts in other countries, academics and economists. This year's forum focused on lessons learned from the crisis and how they can be applied to prevent a repeat of the debacles.

Bernanke again urged a rewrite of U.S. financial regulations, something Congress is involved in. He repeated his call for stricter oversight of companies — such as AIG — whose failure would endanger the entire financial system and the broader economy. Obama wants to empower the Fed for that duty, something many lawmakers oppose.

Bernanke also said the U.S. needs a process to wind down globally interconnected companies, as the Federal Deposit Insurance Corp. does for failing banks.

A strengthening of financial regulation is needed, he said, "to ensure that the enormous costs of the past two years will not be borne again."

A Sign of Economic Recovery? New jobless claims drop more than expected

Does the decline in the number of people seeking unemployment benefits suggest an economic recovery is on the way? In the August 6, 2009 article "New jobless claims drop more than expected" Associated Press economics writer Christopher S. Rugaber reports:

WASHINGTON – The number of newly laid-off workers seeking unemployment benefits fell last week, the government said Thursday, a sign that the job market is making gradual improvement.
Job losses are likely to slow in coming months, economists said, a trend that could be reflected in the government's July unemployment report to be released Friday.
"We believe the lower claims figures are an important economic development and confirmation that the economy is turning the corner," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, wrote in a note to clients.
Still, the number of people continuing to claim benefits rose by 69,000 to 6.3 million, after having dropped for three straight weeks — evidence that job openings remain scarce and the unemployed are having difficulty finding new work. The figures for continuing jobless claims lag behind those for initial claims by a week.
First-time claims for jobless benefits dropped to a seasonally adjusted 550,000 for the week ending Aug. 1, down from an upwardly revised figure of 588,000 in the previous week, the Labor Department said.
That was much lower than analysts' estimates of 580,000, according to a survey by Thomson Reuters. And the four-week average of claims, which smooths out fluctuations, dropped to 555,250, its lowest point since late January.
Some economists now say Friday's unemployment report could show much smaller job losses in July than in recent months. LaVorgna has reduced his estimate of payroll cuts to 150,000, from 325,000. In June, employers cut a net total of 467,000 jobs.
Even so, many retail chains reported sluggish July sales Thursday as consumers proved reluctant to spend. Mall-based chains, such as Macy's Inc. and teen retailers Abercrombie & Fitch, were the hardest hit as shoppers focused on necessities.
Stocks fell slightly in early-afternoon trading. The Dow Jones industrial average lost about 15 points, while broader stock averages also declined.
When emergency extensions of unemployment are included, the total jobless benefit rolls climbed to a record 9.35 million for the week ending July 18, the most recent period for which figures are available. Congress has added up to 53 extra weeks of benefits on top of the 26 typically provided by the states.
Despite the decline in new jobless claims, they remain far above the 300,000 to 350,000 that analysts say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.
The recession, which began in December 2007 and is the longest since World War II, has eliminated a net total of 6.5 million jobs. The unemployment rate is expected to rise to 9.6 percent when the July figure is reported Friday.
More job cuts were announced this week. The publisher of the Milwaukee Journal Sentinel said it would slash 92 jobs as the current advertising slump continues to ravage the newspaper business. Elsewhere, about 6,000 General Motors Co. blue-collar workers have taken the latest round of early retirement and buyout offers. But GM wants to cut about 13,500 workers, setting the stage for more layoffs.
Among the states, Ohio had the biggest increase in claims, with 891, followed by Oklahoma, Mississippi, Louisiana and Alaska. State data lags behind initial claims data by one week.
North Carolina had the largest drop in claims, with 9,809, which it said was due to fewer layoffs in the textile, furniture, rubber and plastics, and industrial machinery industries. Michigan, Florida, Georgia and Alabama had the next-largest declines.

Consumer spending rises in June, incomes drop

According to the August 4, 2009 article "Consumer spending rises in June, incomes drop" by Associated Press economics writer Christopher S. Rugaber:

WASHINGTON – Consumers opened their wallets and pocketbooks a bit more in June, increasing their spending for the second straight month while saving less, even as incomes fell sharply.

Consumer spending is closely watched because it accounts for about 70 percent of total economic activity. Many economists warned that despite the slight increase in June, falling wages and rising unemployment likely will keep spending sluggish for the rest of this year.

Still, the housing market continued to show signs of life as pending U.S. home sales rose in June for the fifth straight month, according to the National Association of Realtors. The group's pending home sales index rose more than expected to 94.6, from an upwardly revised reading of 91.3 in May. The last time there were five straight monthly gains was July 2003.

The Commerce Department said Tuesday that consumers boosted their spending 0.4 percent in June, slightly ahead of analysts' estimates. That comes after spending rose 0.1 percent in May.

Personal income fell 1.3 percent, the steepest drop in more than four years. Incomes rose by the same amount in May, boosted by one-time payments from the government. Economists expected personal incomes, the fuel for future spending, to fall 1 percent.

Incomes benefited in May from a one-time payment of $250 that was mailed to 50 million Americans receiving Social Security and other government benefits, as part of the Obama administration's $787 billion stimulus package.

Excluding the impact of the stimulus, personal income would have fallen 0.1 percent in June after a flat reading in May, the department said.

Wages and salaries fell 0.4 percent in June from May, the eighth straight monthly drop. That makes it unlikely consumers will ratchet up their spending anytime soon, economists said.

"The U.S. consumer will not be much of a help during the early stages of the economic recovery," Joshua Shapiro, chief U.S. economist at consulting firm MFR Inc., wrote in a note to clients.

Amid the longest recession since World War II, the personal savings rate has surged as Americans seek to rebuild their nest eggs after home values and stock portfolios plummeted last year. While saving can be good in the long run, rapid increases in saving can slow the economy.

The department said the personal savings rate fell to 4.6 percent in June, after jumping to 6.2 percent in May, which was the highest since February 1995. The rate dropped as low as 1 percent last year.

Spending may increase in July and August due to the government's "cash for clunkers" program, which has spurred thousands of Americans to trade in old cars for newer vehicles, Shapiro said. But the savings rate is likely to keep rising later this year.

Investors appeared unfazed by the economic report and focused on locking in some profits after a 14 percent climb in stocks since July 13. The Dow Jones industrial average lost about 15 points in morning trading, and broader indices also dipped.

The department also revised its spending and income data back to 1929, as it did last week when it reported second-quarter gross domestic product, the broadest measure of the economy's output. The changes show that Americans saved slightly more than previously thought.

For example, the department revised the savings rate in 2008 to 2.7 percent from 1.8 percent.

The government reported last week that the overall economy, as measured by the GDP, shrank at an annual rate of 1 percent in the second quarter, far less severe than the 6.4 percent decline in the first quarter and a 5.4 percent decline in the fourth quarter of 2008.

Sluggish consumer spending has held back the sales of food and beverage companies. Tyson Foods Inc., the world's largest meat producer, said Monday that sales fell 3 percent in its third quarter. The company posted a strong profit due to cost cuts.

And sales for MillerCoors, the U.S. joint venture owned by Molson Coors Brewing Co. and SABMiller, increased by only 1 percent in the most recent quarter, Molson Coors reported Monday.