Has the Recovery Stalled?

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Is the recovery over? This morning’s report of GDP makes it seem that way.

The government’s gross domestic product report for the first quarter of 2011, which was released Thursday morning, showed that nearly every sector of the economy slowed in the first three months of the year. The report was weaker than most economists expected. And economist have recently been lowering their expectations.

Consumer spending down. Business spending down. Housing sector down. Exports down. Federal Spending; way, way down – not only down, but actually decreased 7.9%, the largest drop in more than a decade. Housing sector also decreasing. There was, of course, one thing that was up: Inflation. Ugh.

So is this a brief pause on the way to a healthy recovery, or is it the first sign, now that the stimulus package has ended and Bernanke says he’ll be no longer juicing the bond market come June, that this recovery was never really sustainable? All the signs this morning point to the later. But in reality we may not be as bad off as it appears. Here’s why:

There is, of course, reason to be concerned about the economy. Today’s GDP report was the first time in more than a year that showed that economy growth was slowing. Analysts had been expecting growth to come down a bit. But GDP growth fell more than even they were expecting. The GDP grew by 1.8% in the first three months of the year. That was down from a rise of 3.1% in the last four months of 2010.

So is this the end of the recovery? Maybe not. The report showed that inflation rose significantly in the first quarter. It’s still low, but it is up from where it was last year. That may have caused people to pull back on spending. Bernanke said yesterday that he thinks inflation will fall again in the second half of the year. And after that people should start spending again. They may anyway. The stock market has been improving recently and that usually puts consumers and executives in a better spending mood. Indeed, this week the measure of consumer confidence jumped, despite the fact that gas prices are over $4 a gallon in many places, and near $5 in others.

Another big drag on the economy continues to be the housing sector. And many people think residential real estate is on the verge of a rebound. Lastly, the jobs market has been consistently improving. The weekly report out today did show an increase in new jobless claims. But weekly reports can be messy. The general trend is that the pace of job growth for the economy is improving. And that’s the most important trend. There has been a question of what comes first – the spending that creates the jobs or the jobs that create the spending. At first we saw a rebound in spending with no rebound in jobs. Now we are seeing a rebound in jobs with no rebound in spending. Eventually these two things will work together. So as long as next week’s jobs number looks healthy, then I would say the recovery is still on track. If not, well then, we might need more than a Bernanke press conference to bail us out.