We have every reason to be confused: The recession is over, but unemployment keeps going up. Banks are turning the corner, but credit remains skin-tight. Foreclosures are going down, but they'll probably head back up. Consumers were spending a little more for a while, but then they stopped. The problem with the economy right now is that it's neither good nor bad, a troublesome circumstance for both policymakers and headline writers. To better understand, I recommend the testimony delivered to Congress by Economy.com's Mark Zandi. It's a little dry in places and Zandi is only one of many opinions, but if you're looking for a primer on what's going on (the effect of the federal stimulus, jobs, housing, credit, etc.), this is a pretty good one. Here are some nuggets:
The Great Recession has finally come to an end, in large part because of unprecedented policy efforts by the Federal Reserve and fiscal policymakers. The cost to taxpayers has been substantial but would have been even greater if aggressive action was not taken and the financial crisis and recession had been allowed to continue unchecked. Now, although the financial system is stable and the recession is over, the recovery is still fragile. There will be times in coming months when the economy will appear to be performing well, but there will be other times when it seems liable to falter again. It is growing clear that more policy help will be needed to ensure that the tentative recovery evolves into a self-sustaining expansion.
GDP growth resumed this past summer as the financial system stabilized. Major financial failures have abated, money markets and equity markets are much improved, and the severe credit crunch of early this year has moderated substantially. This is largely due to aggressive action by the Federal Reserve, the FDIC, the U.S. Treasury, and other financial regulators. Their interventions ranged from the Fed's establishment of various emergency credit facilities to the FDIC's guarantees on bank debt and its increase in the deposit insurance limit. Perhaps most important were the stress tests imposed on the nation's 19 largest bank holding companies this past spring. The housing market crash that was at the recession's center is also moderating. House prices are probably not done falling, but home sales have come off the bottom, and the free fall in housing construction is over.
The fiscal stimulus is also working. The American Recovery and Reinvestment Act passed early this year has reduced payroll tax withholding, sent checks to Social Security recipients, and provided financial help to unemployed workers whose normal benefits have run out. The cash for clunkers program revved up vehicle sales, and the housing tax credit has boosted home purchases. It is no coincidence that the Great Recession ended just as the stimulus began providing its maximum economic benefit. The stimulus is doing what it was supposed to do: short-circuit the recession and spur recovery. Criticism that only $175 billion of the $787 billion stimulus plan has been distributed through tax cuts and increased government spending is misplaced...
Arguments that tax cuts in the stimulus program are not supporting consumer spending are incorrect. Although spending has not rebounded sharply, without the stimulus, it would still be declining. The plunge in stock and house prices has forced families to save more for college or retirement, while the credit crunch has made it all but impossible for many households to borrow. Without the stimulus' support to household income, consumers would still be cutting back. Instead, spending has stabilized, and the recession has ended.
It is possible that firms will resume hiring soon. There is historically a lag between a pickup in production and increased hiring. In the past, however, during the gap between increased production and increased full-time hiring, businesses boosted working hours and brought on more temporary employees. None of this has happened so far; hours worked remain stuck at a record low, and temporary jobs continue to decline. A more worrisome possibility is that firms are too shell-shocked to resume hiring. Smaller businesses are struggling to obtain credit; their principal lenders, small banks, face intense pressure, while another key source, credit card lenders, has aggressively tightened its underwriting standards. As a result, a growing share of job losses are occurring at small businesses.