Are We on the Road to Recovery?

In the final estimate of real (inflation-adjusted) growth in gross domestic product (GDP) for the first quarter of 2009 by the Bureau of Economic Analysis, GDP fell 5.5% at a seasonally adjusted, annual rate. However, this decline was less than the bureau’s preliminary estimate of a 5.7% drop, or the 6.1% decline of its advance report – which is notoriously inaccurate because of the large amount of data missing when the early finding is compiled.

This compares to the fourth quarter 2008 estimates of declines of 3.8% (advance report), 6.2% (preliminary report) and 6.3% (final report).

The back-to-back, substantially negative quarters are certainly painful indicators of an economy in a sharp recession. Nonetheless, the trend indicates that the worst is over, that the decline is slowing and that we will see growth re-emerge.

The National Association of Home Builders estimates that the just completed second quarter of 2009 resulted in a 1.2% decline in real GDP. Looking forward, we expect the economy to expand at an average annual rate of 1.5% in the second half of 2009.

To date, a relatively small amount of the first stimulus package has been spent. Approximately $90 billion of the $789 billion package, or 11%, went into the economy by the end of June, and more of that money is expected to flow into the economy as summer road projects ramp up.

By the end of the year, about $250 billion should be injected into the economy. Typically, it takes six to nine months for the effects of government spending and tax cuts to spread throughout the economy.

Meanwhile, monetary policy remains expansive as the Federal Reserve works to offset the contractionary forces of the financial markets problems, and there is some evidence that parts of the financial markets are returning to normal.

As the need for the Fed’s support in these areas has abated, however, the Fed has pulled back, reducing some of the stimulus of its actions.

Even as the problems in the financial markets ease a bit, lending standards are tightening. Individuals and companies with excellent credit histories are still facing difficulties in obtaining loans. They are being denied loans outright, asked to provide for larger down payments or facing other onerous requirements. This is acting as a drag on the economy and slowing any recovery.