Around the Halls: Is the Recession Over?

The nation appears to have entered a fragile state of recovery, with the worst recession since the 1930s at an end. After four straight quarters of contracting economic activity, the Commerce Department reported this morning that the economy grew in the third quarter of 2009, fueled by government spending on cars and homes. Experts from around the halls of Brookings responded to this news:

Today’s announcement of a 3.5 percent growth rate—slightly above expectations—is a ray of good news in the economic gloom. But it doesn’t mean we’re out of the woods; far from it. Much of the growth reflects the stimulus package and the “cash for clunkers” program, both of which are temporary. Unemployment, already at 9.8 percent, is likely to break into double digits before beginning to decline sometime next year, and long-term unemployment is the highest in many decades. Consumers are burdened with excessive debt, and disposable income will not sustain significant increases in demand for goods and services. Lending is depressed as banks and other institutions have turned cautious, and many solvent businesses are reporting difficulties in obtaining short-term financing. Exports are likely to be one of the few sustainable bright spots, as the steep decline in the value of the dollar against most currencies has made U.S. exports more competitive in world markets.

Still, we’re likely to endure an extended period of modest growth and above-average unemployment as the economy struggles to reduce bloated housing inventories, work off debt, and bring innovations to market. Fiscal and monetary policy cannot remain as “stimulative” as they are at present without risking severe disruptions—interest rate spikes and a full-scale flight from the dollar–down the road. Within two years at most, the private economy will have to wean itself off public stimulants and find its own internal sources of energy. Not a particularly happy prospect for unemployed workers . . . or for the elected officials who may soon join them.

Is the recession over? Well, let’s leave aside for the moment that, unless you’re an economist, the recession probably doesn’t feel like it’s over until jobs and incomes are growing again–and that still seems like it’s a ways off. Instead, let’s recall that the national GDP figure represents the aggregate of economic activity in our nation’s 363 distinct metropolitan economies–the largest 100 of which account for three-fourths of GDP, and form the focus of our quarterly MetroMonitor report. How things look from that vantage point differs greatly across the United States.

We only have metropolitan-level data on Gross Metropolitan Product (GMP), the metropolitan version of GDP, through the second quarter of 2009 (third quarter data, released at the national level today, will feature in our next MetroMonitor, scheduled for release in December), but those data provide a peek at the regional variation likely to pervade the third-quarter data as well. Between April and June of 2009, when our measures suggested that national GDP fell by 0.2 percent, GMP fell in 75 metro areas, and rose in 25. Some of the gainers were economically healthy metro areas, such as Washington, DC; Austin, Texas; and Tulsa, Okla, where job losses have been relatively modest. Those areas seem likely to post the most robust GMP growth in the third quarter, and several may post modest job gains as well.

Yet other metro areas, such as Riverside, Calif.; Cape Coral, Fla.; and Portland, Ore., posted GMP gains in the second quarter even though their job (and sometimes housing) markets remained tremendously weak. Those gains may have resulted from modest gains of higher-value jobs amid much more significant losses in lower-paying sectors like construction and retail. Their GMP figures might grow faster in the third quarter, but for their firms and workers it would not constitute a sign of imminent recovery. Meanwhile, several metropolitan areas in the industrial Midwest–Detroit; St. Louis; and Cleveland among them–experienced second-quarter GMP declines well above the national average. Their auto sectors may have received a temporary boost from the cash-for-clunkers program during the third quarter, but that assistance was short-lived. For them, sustainable output growth may still be a ways off, and, a real jobs recovery, a rather distant point on the horizon.

We’re almost certainly out of the recession as economists think of recessions, which is to say that the economy as a whole is growing again. But there are two critical caveats. First, most of the public thinks of a recession as ending when unemployment starts to improve and that is very unlikely to happen until well into next year. It will get worse on that score before it gets better. Second, we’re unlikely to have fast growth coming out of this recession, unlike most recessions since World War II. The serious damage suffered by the financial sector and the unwinding of the government’s emergency responses will be a severe drag on growth.