Growth cheery, but economy glum

A disconnect: Pocketbook well-being has fallen behind productivity gains.

A gulf has opened up between the economy that Americans are experiencing and the one portrayed in the broadest measure of US production: the gross domestic product.

According to the GDP, the economy is growing – most recently at a 3.3 percent annual pace in the second quarter. Important indicators other than the GDP, though, are walking and quacking like a recession.

Among them: eight straight months of job losses; declining industrial production; a housing market so weak the government was forced into a mortgage market bailout on Sunday; automakers seeking a federal rescue of their own, perhaps up to $50 billion

Why the disconnect?

It may reflect a new reality characterized by mild economic cycles but also by pocketbook well-being that isn't keeping pace with economic productivity gains.

Many economists are saying it's a recession despite the GDP numbers and forecasting a difficult economic climate well into next year.

"It's quite clear that we are in a recession," says Asha Bangalore, an economist at the Northern Trust Co. in Chicago. "I don't know why we're taking so long to use the word…. I don't think we need to see an official announcement."

To some extent, the word choice is academic.

On the heels of their party nominating conventions, presidential candidates John McCain and Barack Obama are both campaigning with a focus on how to meet voter concerns about the downbeat economy.

And on Tuesday, Rep. Rahm Emanuel of Illinois said he and fellow Democrats in Congress will push for a second economic stimulus package this year – this one possibly including an expansion of food stamps and aid to cash-strapped local governments.

It's not just here in Michigan, with its struggling carmakers and nation-leading unemployment rate, where the economy is the top concern.

In a nationwide CNN poll in June, 75 percent of Americans said the nation is in a recession. And last Friday, the national unemployment rate registered a jump to 6.1 percent, the highest in five years.

Yet a popular definition of recession has long been two quarters of declining GDP, something that hasn't happened yet. The only down quarter lately has been the small 0.2 percent decline in the final quarter of 2007.

The official call on a recession is made by a panel of economists, known as the business-cycle dating committee, at the private National Bureau of Economic Research in Cambridge, Mass. They consider a range of data, from job creation to retail sales and industrial production. Yet GDP remains an important part of the calculation. Making things complicated for anyone who wants to know, the panel generally makes its call after the fact, or near the end of a recession, after weighing the revisions that periodically happen to government data.

Why did GDP look so good in the second quarter?

One reason is the temporary boost of an economic stimulus package, enacted earlier this year by Congress and President Bush, which sent tax-rebate checks to millions of families.

But the biggest factor, economists say, was the impact of international trade. A rise in exports helped GDP but didn't necessarily help lots of US workers.

"What little strength there is in the economy is narrowly based," says Mark Vitner, an economist at Wachovia Corp. in Charlotte, N.C. "Most US export industries tend to be very capital-intensive" rather than labor intensive.

Those products include everything from farm produce to medical equipment and industrial machinery.

GDP also got a boost from the weakness in imports. (In government math, what Americans buy abroad subtracts from GDP.) That's another sign that what's good for GDP isn't necessarily telling a good story about ordinary consumers, who have cut back on everything from oil to imported furniture.

The reality for consumers and workers is better captured in other economic surveys. Some economists say those surveys should be getting more weight these days in making the call on a recession.

"I'd put more weight on jobs and wages and the manufacturing sector," says Charles McMillion, president of MBG Information Services, a forecasting firm in Washington. "If I were on the dating committee, I would say that a recession has started and probably started in December or January."

Part of the challenge, he says, is the lack of robust federal funding for gathering the economic data on which policymakers and businesses rely.

Even by broad measures, however, it's clear that the economy is weak. The second quarter aside, growth has been below normal in the past two years. As more workers arrive in the labor force, even a so-called "growth recession" is a recipe for rising unemployment and stagnation in living standards.

Some economists see the current slump as part of a more persistent trend.

"There has been an increased tendency for GDP and employment growth to diverge," says Jared Bernstein of the Economic Policy Institute, a left-leaning think tank in Washington. "The last two recoveries [in 1992 and 2002] were called jobless recoveries."

That means that businesses were growing more productive and expanding output but not adding new jobs as they had in typical expansions.

"What is it that we mean by recession?," Mr. Bernstein asks. "If that means an economy that is not supporting living standards, then we've got a recession."

The positive side of all this, some economists say, is that the past few business cycles have been relatively mild, with shallower recessions as the flip side of the slow recoveries. In fact, the current downturn in some ways is a testament to the resilience and flexibility of American workers, employers, and policymakers. The slump is shallow so far despite two years of surging oil prices and a real estate bust that has wiped out several trillion dollars in housing-related wealth.

Even here in Michigan, a state unequivocally in recession, most activity continues as usual.

"We've been doing very well," says Tim Krynicki, who sells boots at a leather-goods store near Detroit.

Yet foreclosures continue to mount, here and nationwide, which pushed the US Treasury to bail out mortgage giants Fannie Mae and Freddie Mac, where mounting losses and a loss of investor confidence put their ability to maintain operations at risk.

The move puts US taxpayer money on the line, in a bid to make sure mortgage loans remain available as the housing market struggles to find a bottom.

That, coupled with the related problem of tightening credit conditions at traditional banks and investment banks, could make it hard for the economy to stage a strong recovery.

Mr. Vitner forecasts that GDP growth will average a tepid 1 percent for the next three quarters, while Ms. Bangalore sees a small decline in GDP.