Thoughts on the Economy: Hope is Great, Real Proof is Better

Federal Reserve Chairman Ben Bernanke predicted that the economy will improve before the end of 2009, but the country just might not notice it. Bernanke recently told Congress that he believes the economy is nearing the bottom and will start a gradual rise by the end of this year. According to the Associated Press, the Federal Reserve Chairman tempered this hopeful news with a prediction that there would also be "further sizable job losses" in the coming months.

The most recent sign that the economy may be a little less dismal these days was the latest report of the services sector index, which seems to indicate that the pace of the decline was slowing some in April. With over half the country working in service sector jobs like hotels, retail, education and health care, this is an important indicator for the health of the economy. According to the AP, at 43.7 in April the services index is still far below the healthy reading of 50, but better than the 40.8 reading in March.

However, not everyone agrees with Bernanke's positive prediction. "The most you can say is that there are scattered signs that things are getting worse more slowly -- that the economy isn't plunging quite as fast as it was," says financial columnist Paul Krugman. In a recent New York Times column, he listed four reasons not to jump for joy quite yet when it comes to the economy.

First, Krugman notes that industrial production is down to a ten year low and the housing sector remains very weak as foreclosures continue to mount. Next, he is highly suspicious of the banking industries recent "profitable" first quarter. Krugman believes that the banks are just rearranging furniture in the same rundown houses and few real improvements in the financial sector have been made. He also doubts the government's soon-to-be-announced stress test results are going to make things any clearer.

Krugman's last two caveats are that the bottom is impossible to predict and the ride up is a bumpy one. He pointed to the fact that during the Great Depression there were unexpected twists and turns on the way to the bottom and believing in a recovery too soon may actually lengthen the duration of this recession. Even once the economy does recover jobs will be the last thing to bounce back.

That is the one point where Krugman and Bernanke agree. The fed chairman agreed with many economists' predictions that the April unemployment rate will be higher than March's twenty-five year high of 8.5 percent. In the last eighteen months the recession has gobbled up 5.1 million jobs, according to the AP. The national unemployment rate "could remain high for a time, even after economic growth resumes," Bernanke said.

Krugman and other economic analysts hope that the Obama administration will not drop the ball on its economic recovery efforts. Just believing in a recovery is not enough to bring one about, unfortunately. The sentiment seems to be that optimism is great, but well crafted policy is better.


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