Economists Optimistic About U.S. Economy

There may indeed be "glimmers of hope" in the economy, as Barack Obama put it a few weeks ago, but they were clouded last week by the government's report of a worse-than-expected drop in overall economic activity. In the first three months of this year, the gross domestic product shrank at an annual rate of 6.1 percent. Taken together with the 6.3 percent GDP decline in the fall, the past six months have seen the most severe contraction in the U.S. economy since the 1950s.

Yet, even with the shrinking GDP, there was a glimmer of hope: The ADP Employment report showed job losses are slowing.

As the recession goes into its 17th month, this particularly harsh business cycle may be at or near its nadir. The Federal Reserve judges that the economic outlook has "improved modestly" in recent weeks, and many economists are forecasting a smaller decline in the current April-June period, with a tepid recovery after that.

Economists had predicted a milder first-quarter GDP drop of about 4.6 percent but underestimated the severity of the pullback in business investment. The private sector cut inventories by more than $100 billion in the quarter, slashing prices and reducing spending on software and equipment by more than 30 percent. The drop in inventories, however, is seen by economists as a positive development because it clears out warehouses and factory floors and sets the stage for increased production once a recovery begins.

The $787 billion federal stimulus package, meanwhile, did not have an appreciable impact on first-quarter GDP, a fact pounced on by some Republicans. "The president and congressional Democrats have committed more than $1 trillion supposedly to stimulate the economy, and what do we have to show for it?" said Rep. Tom Price of Georgia.

But costly government intervention did stop the collapse of the financial sector, and the stimulus spending is expected to give the economy a boost when it kicks in this spring and summer. "I still think the recession will be over in the latter part of the year, but we could be faced with a very weak recovery," says Barry Bosworth, a senior fellow of economic studies at the Brookings Institution. "Either consumers need to go back to what they were doing before, or we have to find a way to export a lot more."

Consumer spending, normally a major economic driver, does seem to be showing some signs of life. After a plunge in the fall, personal consumption grew at a 2.2 percent pace in the first quarter, responding to low prices. The Conference Board's latest consumer confidence index found some indications that widespread pessimism may be receding. Even so, fewer than 4 percent of consumers say they plan to buy a new car or a new house in the next six months, and only 1 in 4 plans to purchase a major appliance.

"It's possible we're at or near the bottom," says Benjamin Hermalin, an economics professor at the University of California-Berkeley. "But it's kind of a chicken-and-egg thing. If consumers don't buy, business doesn't invest." And if business doesn't invest, the doldrums will continue.

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