If the majority of Wall Street economists are right, the U.S. recession will end this quarter and the global recovery won’t be far behind.
On Wednesday, the International Monetary Fund is expected to nudge up its forecast for 2010 global growth from the current estimate of 1.9 percent, primarily because fears of a more serious economic setback have not materialized.
That makes for a brighter backdrop to this week’s meeting of leaders from the Group of Eight major industrial nations in Italy, where the economic outlook is top of the agenda.
IMF officials are expected to urge the G8 to start planning now for how to go about undoing the special lending programs and stimulus packages worth trillions of dollars that were put in place to prevent the recession from becoming a depression.
Recovery will not be a smooth process, and there are plenty of reasons to be cautious about the strength of the rebound. As Banc of America Securities-Merrill Lynch economist Drew Matus put it, this quarter marks a “new beginning with some nagging reminders of the past.”
First, the good news.
The U.S. housing slump appears to be near an end after 3-1/2 years of decline. That, combined with a strong stock market performance in the second quarter, should stop the hemorrhaging in household wealth after more than $12 trillion in losses since the recession started in December 2007.
Government stimulus money is flowing in the United States and other major economies including Japan, China and Germany.
Global manufacturing surveys show output expanding after a year-long period of contraction. In the United States, the pace of new orders is improving while inventories keep shrinking, so production may need to pick up soon to meet demand.
Figures due on Thursday are expected to provide a good illustration of that. Economists polled by Reuters think U.S. wholesale inventories dropped 1.1 percent in May, while sales were flat.
Those are among the reasons why Matus recently raised his U.S. economic outlook to show an above-consensus 2.7 percent jump in 2009 gross domestic product.
Now for the bad news.
The hangover from the credit binge and bust will linger. Households have a long way to go to patch the hole in their finances, which means even when the recession officially ends, consumer spending will probably remain subdued.
Wednesday’s report on U.S. consumer credit bears close watching for more evidence that Americans are paring their credit card debt as banks clamp down on lending and consumers rethink attitudes toward borrowing and spending.
Job losses are likely to keep piling up at least through the end of the year. Last week’s disappointingly weak June employment report served as a reminder of that. The data showed employers cut a net 467,000 positions last month, far more than expected and considerably more than in May.
“The heavy loss of jobs in June is a warning that the road to recovery will be bumpy, but doesn’t yet indicate that we have gone off the track,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
Gault thinks job losses will continue through 2009, and the unemployment rate, now at 9.5 percent, will peak at 10.3 percent in the first half of 2010.
The White House expects unemployment to climb to 10 percent in the next two to three months, far higher than it envisioned back in January when it was pushing for its $787 billion economic stimulus package.
If there is a bright side to stubbornly high unemployment, it may be that it helps keep inflation at bay even after the recovery gets going.
That takes some of the heat off the U.S. Federal Reserve and its central bank counterparts in Europe and Japan to raise interest rates once the recovery begins.
But the weak job market may also hold back the recovery. Until the job losses taper off, consumers will be cautious in their spending. That in turn creates a bit of a chicken-and-egg problem where companies curb hiring until demand builds, said Sung Won Sohn, an economist at California State University.
“Businesses are determined to trim costs by cutting payrolls,” he said. “Expecting sluggish recovery in demand in the foreseeable future, employers want to make sure that a sustained economic recovery is here before hiring. The job market will become the Achilles’ heel of the coming recovery.”