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The forgettable first half of 2008 is stumbling to a close. On Friday, the Labor Department reported that American employers axed 49,000 jobs in May, the fifth straight month of job losses—an event that signals a recession sure as the glittery ball dropping on Times Square augurs a New Year. The report, which inspired a 394-point decline in the Dow Jones Industrial Average Friday, was the latest in a run of bad news. Auto sales, the largest retailing sector in the U.S., were off 10.7 percent in May from the year before. And housing? Ugh. Nationwide, according to the Case-Shiller Index, home prices in the first quarter fell 14 percent.
Yet hope springs eternal that the second half will be better than the first. Economists polled by the Federal Reserve Bank of Philadelphia in May believe the economy will grow at an annual rate of 1.7 percent and 1.8 percent in the third and fourth quarters, respectively. Lawrence Yun, chief economist at the National Association of Realtors, tells NEWSWEEK that "home sales and prices in most of the country will improve during the second half of 2008." (Yun is the Little Orphan Annie of forecasters. He's always sure the sun will come out tomorrow.) Last month, Treasury Secretary Henry Paulson said, "We expect to see a faster pace of economic growth before the end of the year."
The cause for optimism: the U.S. has called in the economic cavalry, which has responded in textbook fashion. The Federal Reserve has aggressively cut interest rates, bringing the Federal Funds rate down from 5.25 percent last September to 2 percent. Earlier this spring, Congress and President Bush, in a rare moment of bipartisan accord, passed a stimulus package, which will shove nearly $100 billion into the pockets of American consumers by mid-July.
But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.
As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low.
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