A year after Lehman collapse, signs US recovery has begun

A pillar of Wall Street, Lehman Brothers, failed a year ago, setting off a financial firestorm that nearly drove the world back into a 1930s-style Great Depression. On Monday President Obama will assess for the public where America stands post-Lehman – and what remains to be done.

His speech will be watched closely because, so far, Mr. Obama has refrained from positive pronouncements about the economy. Now, with economic green shoots becoming more apparent, the president has the opportunity to begin to shift.

“He will say things are not as bad as they were, but I don’t know if he will admit how good they are,” says Bob Brusca, economist of Fact & Opinion Economics in New York. “He’s having a hard time giving people hope.”

How good are they?

Most economists say the recession ended in June, if not in May. The third quarter (July through September) is expected to show moderate growth. The consensus forecast is for a gain of 2.5 percent to 3 percent in the nation’s gross domestic product (GDP).

But some economists are now beginning to think that’s too low.

“The third quarter is a slam dunk above 3 percent,” says John Canally, an economist for LPL Financial in Boston. “It could be as high as 4 percent.”

The last time the economy grew that fast was the beginning of 2006, when the GDP grew by 5.4 percent, boosted by strong auto sales and consumer spending on washers, dryers, and new furniture.

Economists say it’s not surprising for the economy to have a strong rebound after a steep drop. That happened after steep recessions of 1957-58, 1973-75, and 1981-82, says Mr. Canally.

“Right now, the consensus of economists is for a slow recovery, but history says that’s not what happens,” he says.

The key economic data to watch: the jobless claims that come out each week. If they remain at the 500,000 to 550,000 level, he says, the recovery will be slow. But if they start to drop quickly, “look for a robust recovery,” Canally says.

The current upturn is in part the result of companies refilling their depleted inventories. For example, as a result of the “Cash for Clunkers” program, auto companies quickly ran through their stockpiled vehicles. Now they have to recall workers and build more.

In addition, the economy is going to continue to get a boost from the fiscal stimulus program.

“The last time I looked, only $80 billion of the highway funds had been spent, so there is still another $250 or $300 billion left for infrastructure spending,” says Canally.

Corporations are starting to indicate they feel better about the economy as well. Last week, for example, Federal Express said it may have been too cautious in its guidance to stock analysts about the firm’s earnings prospects. FedEx is very sensitive to the economy.

Members of the Obama administration are also beginning to sound more optimistic about the financial system. Last week, Treasury Secretary Timothy Geithner said the government would begin to pull back from some of its support for banks and other financial institutions.

“This is clearly good news that the system is stabilizing,” says Douglas Elliott, a banking expert at the Brookings Institution.

Although some small and medium-sized banks are still on the ropes, Mr. Elliott says, “it’s not at a level that seriously threatens the financial system.”

The Obama administration has already indicated it wants to require the banks to raise more capital so they are protected from what Elliott terms “mistakes and bad luck.” Obama is expected to raise this point during the Group of 20 nations meeting in Pittsburgh on Sept. 24 and 25.

The Obama administration has been supportive of a significant part of the financial reform effort in Congress. Elliott expects this effort to pass both the House and the Senate before next year’s midterm elections.

“Your average voter knows we’ve been through one of the worst recessions,” says Elliott. “It’s hard to campaign and say reform of the financial system isn’t important.”

Obama may well use his speech to try to encourage Congress to act. “He is a political animal,” says Mr. Brusca. “He sees everything in the context of a political situation.”

-----

Follow us on Twitter.