7 Reasons to Be Optimistic and Pessimistic About the Economy

The American economy is in a period of sustained recovery. But suddenly, in Newsweek, and BusinessWeek, and the New Yorker, there are a blitz of articles predicting that the recovery will be faster, stronger, and broader than most people expect. After all, the optimists argue, look at the stock market, which is going gangbusters. Look at the March jobs report, the best in three years. Look at productivity bursts, and stabilizing home prices, and corporate confidence!

It's true. There are a lot of good things happening in the US economy. But for every bit of good news, there are good reasons to be cautious about our optimism. Here are 7 ways the the health of the US economy is very much in a state of flux.

1. Investing. The S&P 500 is up 74% since March 2009. The Dow is also up about 70% from last year...

But among those who own stocks, bonds, or mutual funds, only 3 out of 10 say the value of their portfolio has risen since a year ago, according to a BusinessWeek poll, suggesting that the gains have been relatively concentrated.

2. Economic Growth. We swung from negative-6% to positive-6% annualized GDP growth in 2009, and the economy has probably been growing since June of last year. Among the largest economies, only China, India, and Brazil are growing faster than the U.S. ...

But consumer debt is still very high, suggesting that there is still quite a bit of deleveraging to come. Moreover, economists anticipate that the era of cheap credit is coming to an end as interest rates on mortgages, car loans and credit cards are all set to rise. This will impede a consumer-led recovery, and with consumption making up approximately 60-70% of GDP, weak consumer spending might restrain dramatic GDP growth. And keep your eye on exogenous factors like oil prices, which continue to creep up.

3. Job Growth. We're finally creating jobs! The economy added 162,000 in March, the best report in three years...

But job openings in February 2010 were no higher than when the economy was plummeting in February 2009. Unemployment is at 9.7%, and broader unemployment -- including part-timers looking for more work -- is near 17%. Those are still horrific numbers. Unemployment is a lagging indicator, but crucial for public confidence in the economy.

4. Income Growth. Productivity has grown 6.9%, the best since 2002. Strong productivity growth suggests rising living standards...

But there are a number of factors weighing down income growth. Part-timers grew in the latest jobs report and the work week at 33.9 hours/per is still near its all-time low of 33.0. That means that when demand starts coming back, employers might begin by extending the work-week and full-timing the part-timers. This would contribute to income growth for the marginally attached, but millions of officially unemployed Americans might be left out, initially.

5. Housing. Prices have stabilized and improved recently. Mortgage rates are extremely low....

But foreclosures and the federal government's drawback of housing-support policies could send home prices into a second dip. As Megan McArdle notes, "the backlog of foreclosures is eventually going to come on the market, further pushing down home values in many areas."

6. Government Stimulus. Last year's stimulus was back-loaded to inject nearly $500 billion into the economy in 2010. What's more, the federal deficit is already running 8% lower than in FY-2009 as the bank bailouts have proved significantly less costly than we imagined...

But whereas the 1982-3 recovery was driven by significant easing of interest rates, the Federal Reserve has little room to push interest rates down in 2010-11. Instead, rates will likely rise late this year or early next year as the Fed unwinds its unprecedented monetary expansion to avert inflation. What's more, the federal stimulus will eventually become a net drag on the US economy, and there seems to be little political will to add another $100 or $200 billion of stimulus. Now that the administration has bragged about running a lower-than-expected federal deficit, they might be unwilling to follow up with a stimulus program that would restore 2010's deficit to its previous high estimate.

7. Business. Corporate profits were up 8% in the fourth quarter and corporate bonds are rallying. According to the Business Roundtable's CEO Survey, 75% of executives expect sales to rise in the next six months ...

But hiring is a different story. In the coming months, half of employers expect no change in employment, 29% expect to hire and 21% expect to shrink payrolls. Small business confidence fell to an 8-month low in March.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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