As Americans dragged themselves back to work after their New Year’s break, they were confronted with something they hadn’t seen in a while: signs of a healthy economy. The Great Recession officially bottomed out in the summer of 2009, but the next 15 months never felt like a rebound. Economic data zigzagged between hopeful and grim, and reporters invariably prefaced any reference to the recovery with qualifiers such as “fragile” or “glacial” or “fitful”. But as the curtain rose on 2011, the economic news was almost giddy.
• Over the winter holiday shopping season—early November to 25 December—consumers spent with an abandon not seen the boom year of 2005. Retail sales were up 5.5% compared with the holiday season of 2009. New car sales, for their part, leapt 11%, the first upturn since the crisis began.
• One economic signal after another blew past economists’ expectations. Hiring and layoff figures, business spending, new home sales—all once moribund, all surged. Forecasters expected, for example, that payroll data would show 100,000 new hires in December; the actual number was 297,000.
•Broadly measured, US stocks rose more than 17% in 2010, capping a 94% bounce from the low they hit in 2009. US stocks now stand within 10% of their all-time high set in the bubble of 2007.
What John Maynard Keynes called “animal spirits” rebounded with the markets. Goldman Sachs chief economist Jan Hatzius, formerly one of Wall Street’s gloomiest forecasters, underwent an apparent attitude transplant, revising his estimates for US economic growth upwards to 3.4% for 2011 and to 3.8% for 2012. “If you focus on the rate of change, it’s a much more upbeat story than it was a year ago,” he told CNBC. The leading measure of optimism in small businesses, whom the crisis had squeezed much harder than their counterparts at larger companies, reached a three-year high in December, and corporate CEOs announced growing willingness to invest in their businesses. Individual investor polls, meanwhile, showed that those who thought the stock market would go higher outnumbered those who thought it would go lower by margins that matched those from before the crisis.
Perhaps most striking was the rewriting of political history that was just two months old. In the campaign that swept Republicans into a majority in the lower chamber of Congress, the key issue was the seemingly out-of-control federal budget deficit, which several Republicans hyperbolically proclaimed would turn the US into the “next Zimbabwe”. President Barack Obama’s first action after the midterm elections was to agree to a Republican-sponsored tax cut that would widen the deficit by another $800 billion. Somehow, what had been regarded as an act of fiscal irresponsibility was transformed into a statesmanlike compromise. “Did you notice the U-turn many political commentators and other Serious People made when the Obama-McConnell tax-cut deal was announced?” wrote the liberal economist Paul Krugman. “One day deficits were the great evil and we needed fiscal austerity now-now-now, never mind the state of the economy. The next day $800 billion in debt-financed tax cuts, was the greatest thing since sliced bread.”
You might think that all right thinking Americans would welcome the return of the nation’s characteristically upbeat attitude. But many of what Krugman calls Serious People have been rather grumpy about their compatriots’ new mood. Pundits who have staked out pessimistic points of view have been particularly uncomfortable. “Signs of an improving economy had me thinking I needed to reassess my pessimism,” mused economist Mark Thoma, in CBS MoneyWatch. But then, sounding almost relieved, Thoma noted that a dip in consumer confidence and a slide in housing prices “have me moving back towards a more pessimistic outlook”.
Other noted pessimists argue that the upbeat economy and stock market are supported by unsustainable government spending and reckless monetary policy and therefore can’t be trusted. Dietary metaphors have been particularly popular. PIMCO’s Mohammed El-Erian, whose “New Normal” diagnosis of the global economy has become the catchphrase for the prospect of long-term US economic decline, dismisses the stock market’s long rally as “a sugar high”. “It has been a meal of government-fed steroids that Mr Market has been feasting on since late summer,” claimed Gluskin Sheff’s David Rosenberg. “All we can say is there will a day when the piper must be paid.”
Even Washington has treated the rebound in optimism as a kind of unwelcome house guest. Republicans, after all, claim to have swept into power on a mandate to cut government spending (in fact, it’s not clear that the voters were saying anything other than that they were fed up with recession). If the Obama administration’s stimulus efforts are actually bearing fruit, it’s much harder to argue that all the economy needs is a bracing jolt of fiscal austerity.
Likewise, Democrats fret that too much positive economic news will convince policymakers that the crisis is over before it really is. Republican budget cutters will then have a free hand to strangle the infant recovery in its cradle. Krugman inveighed in his The New York Times column against what he called “self-denying optimism”. “I worry that policymakers will look at a few favourable economic indicators, decide that they no longer need to promote recovery and take steps that send us sliding right back to the bottom.”
For its part, the media has also tended to be suspicious about signs of recovery. Like economists who need to stand by their negative economic forecasts, we have reputations to protect. In the peculiar calculus of press credibility, negativity is regarded as sophisticated and wise, while optimism can look gullible. Many members of the press, including yours truly, sheepishly remember offering assurances at the beginning of the recession that things would turn out all right. They didn’t, and we’re not eager to look like fools again.
Still, cycles in the economy aren’t decided by the press, or even by Washington. Yes, many potential weak spots remain. But the recession began three years ago, and in the past, that has been time for businesses to shake off their excesses and grow healthy again. Whether or not it is convenient for Republicans or bearish forecasters, that cycle may be turning again and the green shoots of optimism may be a sign of recognition. Wells Capital Management’s James Paulsen put it this way: “A simple rise in confidence (and fading fears) may be the dominant catalyst for improved economic performance in 2011.” The economy, being a human endeavour, depends heavily on psychology of the players. If Americans continue to believe things are getting better, it could well be a self-fulfilling prophecy.
Eric Schurenberg is editor-in-chief, CBS Interactive Business Network, and former editor of Money.
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