Economists now say U.S. recovery is underway, due to stimulus

According to a new survey of economists, an economic recovery from the United States' worst recession in more than a generation has begun, jump-started by the Obama administration's $787 billion fiscal stimulus package. Economists surveyed by Bloomberg News expect the U.S. economy to expand by two percent or more for four consecutive quarters through June 2010.

What's more Bloomberg's panel increased its third quarter GDP estimate by a whopping 1.2 percentage points compared to the July survey; this is the biggest such forecast increase since Bloomberg began the survey in 2003.
The U.S. economy contracted just 1.0 percent in the second quarter after a 6.4 percent swoon in the first quarter. That lessening of the decline, combined with signs of stabilization in the manufacturing and housing sectors, and reduced job lay-offs, suggests the U.S. recession is bottoming. Moreover, the approaching bottom -- and the projected turnaround in corporate revenue that it implies -- is one reason that forward-looking institutional investors have bid-up the Dow and S&P 500 during the past four to five months.

However, the projected expansion in the year ahead won't be enough to prevent U.S. unemployment from hitting 10 percent, the economists said. That would be the first double-digit unemployment rate for the world's largest economy since 1983, which marked the end of another pronounced recession. However, economists and government labor market statisticians caution that unemployment historically is a lag indicator, with job growth typically increasing and unemployment declining months after the recovery starts.

If the U.S. economy resumes growth with adequate job creation, the condition would validate the Obama administration's $787 billion fiscal stimulus package as at least one factor in the turnaround.

Last winter, conservatives, including most Republicans in Congress, vociferously opposed the fiscal stimulus package, calling it wasteful, needless government spending that simply increased the national debt and the tax burden of future generations. They argued that government intervention was not needed to end the recession, and that the free market, left to its natural forces, would generate its own recovery, after imbalances and excesses were worked-out of the economy. The correct action, conservatives and Republicans argued, would have been to cut taxes, cut government spending, and reduce federal regulations that hinder commercial activity.

Now, however, if the survey of economists is correct, the fiscal stimulus is working as intended -- providing the initial increase in demand that's critical to jump-starting commercial activity. The Congressional Budget Office said the stimulus plan has pumped about $125 billion into the U.S. economy so far.

More recently, another "mini" stimulus plan has provided more evidence of the validity of Keynesian economics, which argues that the government can serve as a tool in economic policy. The "cash-for-clunkers" car program, which was denounced by critics as insignificant, a gimmick, and another wasteful government program, is now being credited with jump-starting sales and traffic in the nation's formerly lonely auto showrooms.

What's more, the "clunkers" program is not only jump-starting sales of eligible, new, higher-mpg cars, it's also igniting sales of late-model used cars. The reason? Citizens who enter showrooms but who learn that they may not be eligible for the clunkers program are being greeted by receptive auto salespersons who are more than willing to make an attractive deal on a late-model used car, prompting many of these citizens to snap-up good deals on even cheaper vehicles. The rising auto sales have depleted dealer inventories, The Washington Post (WPO) reported Wednesday, and that means auto manufacturers will have to increase production to restock car lots, providing a further boost for the economy.

This has led to a decidedly upward revision in the third quarter U.S. GDP forecast by the economists surveyed. Suddenly, economists no longer see low growth in the third quarter but respectable growth of two percent.

How should investors view the forecast? The nation is still shedding jobs (a major negative) and the Bloomberg survey was small (about 50 economists). However, the signs of stabilization and/or increasing demand are occurring almost weekly now, and that points to a future with GDP growth, starting as early as the third quarter. If that occurs, it would be the best news for corporate revenue/earnings and for the U.S. stock market in about two years.
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