For several months starting late last year, it looked like Morning in America was finally back upon us. Unemployment claims were dropping dramatically, businesses were adding hundreds of thousands of jobs, and it looked like the country was in the midst of a self-sustaining economic recovery.
Some economists saw a boom coming. They believed years of depressed economic activity had created a huge pent-up demand for automobiles, housing, and other major purchases. The spending dam was about to burst. This is the business-cycle theory of how recessions end on their own. Eventually, stuff needs to be replaced.
But the surge didn’t last, and just as quickly as the economy grew, it slowed back down again.
Now one of the forecasters who publicly predicted a sustainable recovery says a combination of economic headwinds and poor timing pre-empted a turn toward high growth. More importantly, he no longer believes the ingredients for swift growth exist to turn the country around quickly.
“The factors are still there but my confidence that they’ll come together and burst into a big ramp up and drive the economy into equilibrium — I’m much less sure about that now,” said Karl Smith, an economist at University of North Carolina at Chapel Hill’s School of Government, and author of the blog Modeled Behavior in a Wednesday telephone interview.
A few months back, Smith believed the economy was poised for a breakthrough. Rents were soaring, as were used car prices — both signs of pent-up demand — and that presaged a simultaneous boom in new car sales and apartment development. It didn’t quite sync up.
“What I think I missed was how fast multi-family housing would be able to ramp up,” Smith admits. “it was at a much gentler pace than I thought … So that’s been delayed. We’ve seen maybe a 60 or 70 percent rise, but we’re not back to the level we were before the crisis despite the huge number of renters we have.”
But to really make the transition from slow to rapid growth, many economic waves have to crest simultaneously.
“There’s a big difference between them all hitting at once, and them playing out over time,” Smith says. “When they all happen at once, it kind of kickstarts the whole economy, you put on more demand to service all those people — there’s just a big kick that happens in the economy. If it all happens slowly, it could dribble out.”
Outside forces didn’t help. State and local government worker layoffs continued, the crisis in Europe re-emerged, and Fed officials signaled weak commitment to fostering the recovery.
“As things started to pick up in the beginning of the year, [Fed officials] started talking about how they may have to raise rates earlier,” Smith said. “That did give a sense to people in the financial markets that credit could really start tightening. That could be part of the reason why housing and apartments had a harder time finding financing. I don’t think everything was going to be great if that hadn’t happened, but they contributed another headwind. It was shockingly unhelpful.”
Absent some new catalyst, Smith says it’s hard to imagine the economy will jumpstart itself.
“The European situation is only going to be a headwind in the opposite direction, so we’d need a bigger kick.”
Image from Shutterstock.
Brian Beutler is TPM's senior congressional reporter. Since 2009, he's led coverage of health care reform, Wall Street reform, taxes, the GOP budget, the government shutdown fight, and the debt limit fight. He can be reached at email@example.com.