Recovery Rewards Investors as Jobless Deny Historical Rebound

People wait in line at a job fair in Washington
People wait in line at a job fair in Washington, D.C. Photographer: Joshua Roberts/Bloomberg

The U.S. economy may return to its pre-crisis peak next quarter after a recovery former Federal Reserve official Peter Hooper calls “surprisingly strong, historically weak,” which has seen corporations and the rich prosper while small companies and the unemployed struggle.

The advance has “substantially exceeded expectations but remains well behind the norm,” said Hooper, chief economist for Deutsche Bank Securities in New York. He forecasts the U.S. will grow by 4 percent in the second quarter and 3.7 percent in the third, lifting gross domestic product above the $13.4 trillion peak set in the second period of 2008.

The economy has expanded an average 3.7 percent a quarter since the middle of last year, two-and-a-half times more than the median forecast of 58 economists surveyed in June 2009 by Bloomberg News. That still left first-quarter GDP shy of its previous pinnacle, according to Commerce Department data -- the only time since 1955 the U.S. hasn’t gained back all the ground lost in a recession during the first nine months of a rebound.

The recovery has created what former Fed Chairman Alan Greenspan calls “a bivariate type of economy” in which some have thrived and others have not.

First-quarter earnings for the 460 companies in the Standard & Poor’s 500 Index that reported results through May 14 climbed 55 percent from a year ago, with 353 beating estimates of analysts surveyed by Bloomberg News. The surge in corporate earnings has helped push up the S&P 500 stock index by 68 percent since March 2009, boosting the net worth of Americans who own shares.

Small companies haven’t fared as well. More than half reported falling profits in a survey by the Washington-based National Federation of Independent Business last month.

Cut Payrolls

Unemployment, at 9.9 percent, is near a 27-year high as employers have cut payrolls by eight million since July 2007. The rate is more than twice the 4.7 percent reported by the Labor Department prior to the start of the recession in December 2007.

“It’s not just about Wall Street vs. Main Street,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the Newport Beach, California-based manager of the world’s largest bond fund. “It’s about large companies versus small companies and wealthy households versus those less well off.”

The uneven recovery may force Fed Chairman Ben S. Bernanke to keep the benchmark federal funds rate on overnight loans among banks near zero until the second quarter of 2011 to help reduce unemployment, said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York.

Hurt Democrats

The economy’s performance also may hurt Democrats in the November elections, according to a computer model developed by Ray Fair, a professor at Yale University in New Haven, Connecticut. It forecasts that the party’s share of votes in races for the House of Representatives will fall to 50.43 percent from 53.4 percent in 2008. The Democrats won 257 seats in the previous election to the Republicans’ 178.

The shape of the recovery has been dictated by the nature of the recession, Hooper said. The decline was triggered by the bursting of a housing-market bubble and a credit crisis, not by the Fed raising interest rates to curb inflation. As a result, neither housing nor consumer spending has played as large a role in the rebound as in the past, he said.

“It’s just a slow recovery,” Kurt Kuehn, chief financial officer for Atlanta-based United Parcel Service Inc., told analysts on April 27 after the world’s largest package-delivery company reported a 33 percent rise in first-quarter profits. “We are seeing things firm but at a fairly measured pace.”

Structural Impediments

The bifurcated economy has economists divided over what lies ahead. Some highlight the cyclical forces spurring growth. Others stress structural impediments restraining it.

Macroeconomic Advisers in St. Louis forecasts the U.S. will grow about 4 percent in the second half of this year and in 2011, powered in part by renewed demand for cars and housing. Sales of automobiles and light trucks rose 20 percent in April to a seasonally adjusted annual rate of 11.2 million, according to Autodata Corp. of Woodcliff Lake, New Jersey.

“We are optimistic that a market recovery is now under way,” Earl Hesterberg, chief executive officer of Group 1 Automotive Inc., a dealership chain based in Houston, said in a May 3 interview.

April sales were still below the 15 million to 15.5 million that Alan Levenson, chief economist at T. Rowe Price Associates in Baltimore, says is needed each year to replace scrapped vehicles and take account of growth in the driving population.

Housing Starts

Housing starts, which rose 1.6 percent in March to a seasonally adjusted annual rate of 626,000, are also below their long-run trend, which Levenson puts at 1.25 million a year.

Companies are stepping up spending after putting off purchases during the recession. Orders for capital goods, excluding aircraft and military equipment, rose 4.5 percent in March, according to the Commerce Department.

Intel Corp., the world’s biggest chipmaker, is “seeing signs of corporate demand returning, which we believe will continue to improve, given the age of the corporate PC fleet,” Paul Otellini, president and chief executive officer of the Santa Clara, California-based company, said in an April 13 conference call with analysts.

Pimco’s El-Erian remains unconvinced by the economy’s recent strength. He sees growth slowing to about a 2 percent annual pace in the second half and beyond, held back by consumer retrenchment, financial regulation and fading government support.

‘Muted Recovery’

“The muted recovery is particularly notable given the massive size of the government fiscal stimulus and the extreme loosening of monetary policy,” he said in an e-mail. “It’s a reflection of both the depth of the dislocation experienced in 2008-09 and, more importantly looking forward, the structural headwinds facing the US economy.”

Nouriel Roubini, a New York University professor who heads his own consulting company, agrees.

“The private sector has to deleverage,” he said in a May 11 interview on Bloomberg Television. “And now the public sector has levered up significantly and also has to contract. So both the public and private sector are going to spend less, and that, in the short run, means slow economic growth.”

Some businesses are reserving judgment. “While the economy is getting stronger, it is unclear how strong it really is,” Karen Hoguet, chief financial officer of Cincinnati-based Macy’s Inc., the second biggest U.S. department-store chain, said in a conference call with analysts and investors on May 12.

Optimists, Pessimists

Allen Sinai, chief global economist at Decision Economics in New York, splits the difference between the optimists and pessimists, forecasting growth of about 3 percent in the second half and 2.5 percent to 3 percent next year. What worries him is what might happen afterwards, as President Barack Obama’s administration battles to reduce unemployment at the same time it’s trying to reduce what the White House projects will be a record $1.6 trillion federal budget deficit in the year ending Sept. 30.

The dilemma, as Sinai sees it: Cut the deficit by raising taxes or reducing spending, and risk slowing down the economy and pushing up unemployment. Spur job creation through tax credits for new hires or infrastructure spending, and blow out the budget, risking the ire of foreign investors.

“We’ve got to deal with the legacies of the great recession and the policies we used to get out of it,” he said. “The expansion could end up being relatively short.”

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