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The U.S. Economy: Back from the Brink?

A year after the collapse of the U.S. economy, a number of experts are declaring that the recession is "technically" over. But don't start the celebration just yet.

Mark Crawford (Oct/Nov 09)
Is the economic recession really over? It depends on who you ask:

• On September 15, 2009, U.S. Federal Reserve Chair Ben S. Bernanke announced that, from a technical perspective at least, the recession has ended. The Federal Reserve also indicated that 11 of its 12 regions reported stable or improving economies in July and August.

• In its Labor Day 2009 report, the National Association of Manufacturers (NAM) reported economic conditions in the manufacturing sector improved slightly over the summer, but sternly warned that those gains are very fragile.

• Troy Berg, president of Dane Manufacturing Company in Dane, Wisconsin, an Inc. 500 company with 30 employees and $6 million in annual revenues, states the company experienced a 15 percent decline in business in 2008, followed by 50 percent drop in the first quarter of 2009. "We finally had to shed jobs," he says. "January and February were very hard, but orders have picked up about 10 percent [for] March, April, and May. Like many other companies, we are stuck at this level, which will be a way of life until consumer confidence improves."

Confused? You're not alone.

"The fourth quarter of 2008 and first quarter of 2009 were very tough from a site selection perspective," says Mark Sweeney, senior principal for McCallum Sweeney Consulting in Greenville, South Carolina. "Overall activity level was near zero from November through February, a result of tremendous uncertainty around continuing financial bad news and the questionable impacts of the federal bank and insurance bailouts."

Beginning in March 2009, however, and especially through the second quarter of 2009, Sweeney has seen an increase in activity. "Many of these were competitive consolidations, gaining the benefits of new facilities and cost-cutting at the same time through facility and operation consolidations," he says. "Some major manufacturing projects in long-term growth areas such as alternative energy and advanced materials are also moving forward."

Jim Colson, president of site selection for Angelou Economics in Austin, Texas, sees the same trend. "We have some companies that are advancing with new projects," he says. "That said, we still have projects that are being postponed for 12-18 months. Overall, companies still have a high level of caution and want to see how things turn out economically before they take on major capital investments."

Some Positive Indicators
Manufacturing has always been an excellent indicator of economic performance. The Institute for Supply Management's (ISM) manufacturing index (also known as the purchasing manager's index), one of the most-watched indicators of production activity, has been showing positive signs of recovery. The index measures the extent to which manufacturing is contracting or expanding, with a number below 50 indicating contraction. Showing slight but steady improvements over the the first two quarters of 2009, in August, the index jumped to 52.9 percent from 48.9 percent in July. The ISM index for manufacturing inventories held almost stable at 34.4, while customer inventories declined further to 39.0 (down from 42.5). This suggests that inventories at the manufacturing level are still declining at a fast pace and demand at the retail level is outpacing supply. Some manufacturers are planning to boost production in the coming months to meet new demand.

"Manufacturing activity in this early stage of the recovery is being driven by a classic inventory swing - particularly in the automotive sectors," says Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI. "Another encouraging development from the August ISM report is that prices have accelerated. Rising supplier price pressure confirms that demand is firming."

Norbert Ore, the ISM's survey chief, echoes the cautious optimism. "The 18-month decline in manufacturing output has come to an end, as 11 of 18 manufacturing industries are reporting growth when comparing August to July," he says. "While this is certainly a positive occurrence, we have to keep in mind that it is the beginning of a new cycle and all industries are not yet participating in the growth."
 
It's tougher to find a silver lining in the unemployment numbers. In August 2009, the national unemployment rate climbed to 9.7 percent, but only with an additional 216,000 lost jobs - the smallest job decline in 2009 and 9,000 fewer than expected. The ISM employment index rose slightly from 45.6 percent to 46.4 percent, suggesting industries are still cutting jobs but at a slower pace. "It's good to see the rate of job losses slow down," says Nigel Gault, chief U.S. economist at IHS Global Insight. But with unemployment rising, "there isn't the underlying fuel there for strong consumer spending growth," which is vital for a strong recovery.

Figures released in September 2009 showed that U.S. retail sales in August were up 2.7 percent, the biggest increase in 3.5 years - a reflection of improved consumer confidence. The Conference Board's latest nationwide Consumer Confidence Index indicates that U.S. consumer confidence rose from 47.4 points in July to 54.1 in August, reaching its highest level in eight months.

"The consumer remains the weak link in the recovery," according to HIS Global Insights in its September 2009 U.S. Executive Summary. "Consumers will spend when the deal is attractive enough, as shown by the success of the Cash for Clunkers program. But debt burdens remain high, and wealth depleted, while incomes have taken a beating from the deteriorating labor market. It remains difficult to make a case for a robust consumer recovery."


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