Dow Hits 11,000, But Still in Recession?

The Dow Jones Industrial Average has surpassed 11,000 today for the first time since September 2008. Yet, the U.S. could still be in recession, according to a statement released today by the National Bureau of Economic Research's Business Cycle Dating Committee. The group of academic economists declined to declare the recession over. According to the stock market, however, Wall Street would beg to differ. Who's right? Possibly neither.

Those Conservative Economists

The economists cited above have reason to be reluctant in asserting that the U.S. is in recovery: they don't want to be wrong. Their discipline is coming out of a very difficult time period when a near-depression caused them to question some of their very base assumptions. The last thing academics want to do is wave a "Mission Accomplished!" flag, only to look absurd again if they're wrong.

But it's also reasonable to remain cautious. Unemployment hasn't shrunk by much; underemployment remains frighteningly high. Although those are lagging indicators, they have an effect on consumer spending. The housing market also remains fragile. Foreclosure rates are still stubbornly high, and it's hard to gauge how much demand there will be for home buying when the government credit expires in April. Finally, GDP has increased significantly, but much of that could be due just to government stimulus, so it's hard to determine how much sustainable economic growth has occurred.

With that said, it's sort of crazy to say the U.S. isn't in recovery.* GDP growth has been positive for several quarters, some of which appears to be driven by legitimate business activity not directly related to government spending. The financial markets are far healthier than they were 18 months ago. And even the jobless numbers went positive in March, which looks more like a reasonable tick in the trend than a blip. If the U.S. economy sunk again to negative GDP growth in late 2010 or early 2011, would anyone really doubt that the U.S. experienced a double-dip, as opposed to concluding that the 2007 recession is still underway?

Those Crazy Traders

On the other hand, equities have experienced an incredible bull market over the past 13 or so months. On March 9, 2009 it hit a low of 6,547. Today, it soared to 11,020 around noon. That marks a whopping 68% rise over that period. Clearly, traders are betting the recession is well behind us.

But the stock market is a strange beast. It's not as much about fundamentals as it is about expectations. That should be pretty obvious through the fact that the U.S. economy isn't 68% better now than it was 13 months ago. Expectations, however, have gotten considerably cheerier. Only the most pessimistic forecasters predict a double-dip at this point. Last week, some economists also began revising their views that unemployment would be as prolonged as was initially thought. They believe the U.S. could be in for a steeper recovery than anticipated.

An argument against that view can be found here. Even if the U.S. is in recovery, structural changes in the economy could prolong joblessness. The unusually high underemployment should also be considered. Although optimism that the U.S. is in recovery seems warranted, a 68% rise in equity prices could involve some irrational exuberance, as the fundamentals aren't likely to pick up to match such growth in the near-term.

Somewhere In-Between

So Wall Street and the academic economists may both be wrong. The truth may be somewhere in the middle. While the worst appears to be behind the U.S. economy, a steep recovery doesn't seem particularly likely, given the indicators explained above. So there's probably reason to be optimistic about the improvement in the economy, if not yet reason to be ecstatic.

* Update: Just to be clear, the economists aren't saying that we're still in a recession, just that they aren't ready to declare that it's over yet. They generally have a significant lag time between when a recession actually ends and when they declare it over. So their stance isn't altogether surprising. But it is notable that they certainly aren't jumping on the runaway recovery train that Wall Street appears to be riding on.