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Time to Redefine Recovery?

by Dennis Jacobe

The U.S. economy grew at a 2.4% annual rate during the second quarter, which seemingly reconfirms the views of most economists that an economic recovery is already underway. Still, less than half of all American investors describe the current economy as being in a recovery or a sustained economic expansion, according to the most recent Gallup/UBS Index of Investor Optimism poll*.

Why is there such a significant disconnect between the economic data and investors' perceptions? The answer clearly lies in the job market. Over the same three-month period that the economy showed better-than-expected economic growth, the economy lost 170,000 jobs. In fact, payroll employment in the United States has declined for the past six months.

The popular description of these seemingly inconsistent economic trends is a "jobless recovery." But this new euphemism is neither accurate nor sufficient. In fact, a more precise definition might be a "job-loss recovery." However, as far as American investors, consumers, and employees are concerned, both of these descriptions may appear to be oxymorons.

Has the Economy Hit Bottom?

A majority of investors interviewed by Gallup (53%) say the economic downturn has already hit bottom -- the same majority as in May and a substantial improvement from March, when only about a third of investors thought the economy had bottomed out. Still, the fact that 43% of investors do not think the economy has hit bottom contrasts sharply with the predictions of most economic forecasters.

How Do You Describe the Economy?

Forty-six percent of investors tell Gallup that the U.S. economy is currently in a sustained economic expansion (5%) or a recovery (41%). This is a substantial improvement from January 2003 and January 2002, when these percentages were 36% and 29%, respectively. This assessment of the economy is also much improved since 2001. Still, despite what most economists and government officials are saying about an economic recovery, a majority of investors believe that we are currently in an economic slowdown (32%) or a recession (21%).

How Will the Economy Recover?

Two-thirds of investors say the economy will improve slowly over time before it recovers fully. This percentage is the same as in May but an improvement from March, when only 48% of investors thought this would be the case. Despite all of the optimism among economic forecasters, one in three investors still say that economic conditions are going to get worse before they get better.

What Is an Economic Recovery?

Economists and public policy-makers have some well-established ways of defining how the U.S. economy is performing. If overall economic growth, as measured by the gross domestic product (GDP), decreases for two consecutive quarters, then there is a recession. No growth means we have economic stagnation. Economic growth like what the United States experienced in the second quarter means the economy is expanding, and when such an expansion follows a recession, we call it a recovery.

Traditionally, these terms have carried much meaning for the average American. Recession meant fewer jobs, wage compression, and fears about future economic conditions. Stagnation meant relative job market stability but little prospect for short-term improvements. Recovery and economic expansion meant new jobs, increased wages, and an improving economic future.

The current difference in perspectives between economists and the average American lies in the fact that these traditional economic relationships no longer seem to hold. If the current job losses during the recovery are a short-term phenomenon, then the disconnect will disappear as future economic growth brings a lagged improvement in the jobs market.

However, if this disconnect reflects a long-term structural change in the way U.S. companies hire, operate, and grow, then the current definition of an economic recovery based on GDP growth will quickly become an anachronism, at least for most Americans. Instead, economists and policy-makers would be wise to redefine their use of the terms "recovery" and "recession" based on conditions in the jobs market -- job gains and losses. If everyone simply acknowledges that we're in a (jobs) "recession," we can reconnect the nation's economic dialogue between Wall Street and Main Street.

*Results for the total dataset are based on telephone interviews with 805 investors, aged 18 and older, conducted July 1-17, 2003. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.


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