The 97-lb. Recovery

Remember the recovery? It officially began way back in the middle of 2009, 18 months after the financial system–and then everything else in the American economy–fell apart. Given that nobody has gotten much of a raise since then and that unemployment is still above 8%, you’d be forgiven for not noticing that there’s been a rebound–until, maybe, now.

In the past few weeks, signs of economic expansion have been everywhere. Factory managers’ purchasing orders, one of the most closely watched economic indicators, reached a bullish six-month high in January. Weekly out-of-work claims have fallen to four-year lows; the stock markets (led by, of all things, banks) are rising; business and consumer-confidence figures are ticking up. And even housing permits hit a three-year high. The positive data prompted Mitt Romney–who plans to use the economy as a hammer against President Obama–to admit that things are improving for the 99%. “Whisper it,” says Goldman Sachs chief economist Jim O’Neill, who’s been bullish on America for some time now. “The U.S. economy is returning to normality.”

But the definition of normality has changed a lot over the past two decades. Technically, we’re in an expansion, since economic output has now eclipsed its 2007 peak. But practically speaking, we are in a never-never land of a recovery. Income growth is nonexistent, we still have a $3.7 trillion housing hole to dig ourselves out of, and we’re 5.3 million jobs short of full employment. It’s a recovery, all right–but not as we’ve ever known it.

Perhaps the best way to think of it is as a patchwork recovery, one that creates minibooms in mining hills, social-networking start-ups, auto factories, hospitals, railroads and convention centers but leaves vast swaths of the country untouched. The U.S. will likely grow 2.5% or more this year–but we are still far from the 3.4% average growth we have enjoyed for most of our post–World War II history. In statistical terms, says JPMorgan chief economist Michael Feroli, we are experiencing one of the slowest expansions on record. Which suggests an opportunity for some savvy bumper-sticker entrepreneur: HONK IF YOU’VE FELT THE RECOVERY.

Redefining Recovery

The fact is, each recovery since 1990 has been weaker, and taken longer, than the one before. According to the McKinsey Global Institute, in all the recessions from World War II to 1990, U.S. employment returned to prerecession levels roughly two quarters after GDP did. In the three recoveries since, though, there have been lengthening lags. At the current rate of job creation, it will take about 33 more months to restore the jobs lost in 2008 and 2009.

Much of the reason for that trend lies with the unalterable forces of globalization and technology-induced job destruction, which are speeding up and disrupting a greater range of white collar jobs as software and global broadband connectivity improve. (Insurance agents and X-ray technicians, your jobs are already being outsourced to India; paralegals, processing managers and investment analysts–you’re next.)

There are also case-specific reasons this has been a 97-lb. weakling of a comeback. As academics Ken Rogoff and Carmen Reinhart wrote in their seminal book This Time Is Different, economic rebounds that come after financial crises are harder and take a lot longer, thanks to all the unwinding of debt that must be done–in this case, largely from housing. No other postwar recession had to lift the deadweight of the real estate collapse we’ve just been through.

While there’s been some improvement recently in commercial real estate and multifamily dwellings (rental rates are ticking up since a lot of people still can’t get loans to buy), the single-family-home market remains rotten. The Case-Shiller home-price index is down 34% from its peak and continues to fall, albeit more slowly than in the past few years. Until it stabilizes, the majority of middle- and lower-income Americans whose wealth is tied mainly to housing won’t feel as well off as they otherwise might.

But those holding stocks will likely feel better. The S&P is up 9.5% this year, and with good reason. Corporate America has continued to be profitable, generating some $2 trillion in cash by continuing to cut costs, squeeze more work out of people and exploit growth in developing markets. Apple, whose money tree was ripe with nearly $100 billion in cash, finally shook it in March. The company will pay out $45 billion in dividends to investors and buy back an additional $10 billion in shares. That’s a modest stimulus plan of its own.

Windfalls like those make investors feel better about their prospects, and when they do, they stop sitting on their pocketbooks. We saw this in February, when retail sales were up a respectable 1.1%. And it happened in the last quarter of 2011 too. According to the Federal Reserve, consumer debt not tied to housing rose $20 billion in the fourth quarter, while mortgage and home-equity debt fell $146 billion.

The Spend-Again Trend

For the past few years, we’ve been admonished to stop spending and increase savings, but we’ve done so to the detriment of growth. More than 100 million credit-card accounts were shut down during the recession; today, we’re still paying down our personal debts even as we finally start to increase our spending.

You can see it in the aisles of Walmart, the giant discount chain that struggled uncharacteristically to keep its equally struggling customers in its stores in the depths of the recession. Shoppers had traded down to dollar stores like Family Dollar to stretch their grocery money. In February, Walmart’s U.S. outlets reported two consecutive quarters of growth in same-store sales for the first time in two years. Consumers still constrained by flat incomes and credit limits aren’t going wild, but they are starting to shop again while still living within their means.

David Hernly, a dentist in Grand Rapids, Mich., has been staring into the mouth of the recession for years. “We were pretty flat in 2010 and 2011,” he says. “But we’re starting to see growth again.” Many of his new patients, about 30 a month so far, hadn’t seen a dentist in years. “A good percentage are getting back to work, so they have insurance again,” he says.

That kind of adjustment–on personal, professional and corporate levels–is going on across the country. And it’s one of the big reasons the U.S. is growing faster than nearly every other rich country, especially when there are still serious global economic headwinds, including high oil prices and a sovereign-debt crisis in the euro zone. The E.U. economy will likely shrink by 0.3% this year, and one of the key reasons is that Europeans haven’t done nearly as much to unwind debt problems as Americans have. Indeed, the U.S. has brought its overall public- and private-debt level down faster than any other country since the financial crisis began.

That U.S. banks are rebounding while the European banking system is wounded and retrenching points to the fact that U.S. policymakers, unlike their European counterparts, actually learned the lessons of the Japanese banking crisis of the 1990s: you have to act swiftly and decisively to contain damage and allow the healing process to begin. TARP cost us more than $400 billion–all but $133 billion repaid–but four years later, we are in an expansion. The European Central Bank just shelled out $1.3 trillion in loans for the European financial system alone, but the continent is nowhere near the safety zone.

Driven by Automobiles

The revitalized U.S. auto industry resumed its traditional role as the shiny new model of recovery. Last year, auto-loan originations hit $289 billion, some 41% higher than in 2009. In Blue Springs, Miss., Toyota just added a shift to its plant to crank out more Corollas. Honda is pouring money into Ohio. In Belvidere, Ill., a postbailout Chrysler is adding 1,800 jobs to assemble its new Dart compact. According to the math of car manufacturing, each one of those jobs will create four others.

And plenty of the steel for those cars will be carried by the Union Pacific Railroad. “We thought it was going to be a slow start to the year, but autos are leading the pack for us right now,” says Union Pacific CEO Jack Koraleski. UP will hire more than 4,000 people this year, a net of 1,200 new jobs. UP’s energy business is also booming; it will double its carloads to and from energy-producing areas such as the Bakken shale belt in North Dakota and the Permian Basin in Texas. And UP is spending $3.6 billion on its infrastructure, including a new $400 million intermodal and fueling facility near Santa Teresa, N.M., that will help the company take advantage of an insourcing trend that is bringing some work back to the U.S.

Does all this reflect the sort of American economic exceptionalism that we liked to believe in before the financial crisis? In some ways, the answer is yes. Not only did our policymakers get certain things right, but also demographics and culture are in our favor. American workers are, on average, younger than workers elsewhere in the developed world, which helps a lot with growth, and both employees and employers tend to be more flexible and innovative–and thus quicker to take advantage of opportunities.

The U.S. also has a relatively weak currency, a huge factor in bolstering manufacturing. “The cheap dollar, technological advantages and relatively flat wage growth in the U.S., which has so far been seen only as a curse, are starting to work in America’s favor,” says Ruchir Sharma, a Morgan Stanley managing director and the author of Breakout Nations, which is optimistic about U.S. prospects in relation to both rich and poor nations.

Yet all these factors also speak to why this has been a hollow expansion. Sure, lower wages have made us more globally competitive and brought some jobs back home, but they also make us feel poorer. In statistical terms, the average working-class American hasn’t gotten a raise since the 1970s, which addresses the deepest problem in our economy: there are good jobs at the top and plenty at the bottom but not enough in the middle. Those that have been created in recent years in areas like manufacturing are fragile. The insourcing trend has in large part been a response to higher oil prices, which makes shipping products to and from faraway countries more expensive.

Here Today, Gone Tomorrow?

A good chunk of U.S. job creation has also been about a boom in emerging markets. Companies like Caterpillar, which delivered record-breaking sales and 83% profit growth last year, did so in large part because of sales to countries such as China and India, which are in a construction boom, as well as to mining centers in the U.S. and abroad that are working overtime because of the commodities spike.

But many experts, like Sharma, think both the commodities and developing-nations booms are ending. Oil and gas prices could retreat by autumn, as emerging markets start to slow. (And if the Middle East is calm.) China, India and many other countries have downgraded growth forecasts for this year by a percentage point or more. The days of double-digit growth for emerging markets are over–and that has myriad implications for the U.S. economy. It could slow export growth. (Indeed, our trade deficit, which shrank last year, has started growing again.)

There’s one possible silver lining to this trend, which is that a lot of the investor money that flew from the U.S. to emerging markets over the past decade might start returning–particularly to technology, which looks primed for another boom. While the current Internet-IPO rush evokes the heady days of 1999, when dotcom stock prices got insane, plenty of investors think this run-up in tech stocks has much further to go. “Yes, there is madness in the social-networking start-up worlds, but the valuations of the vast majority of big-cap tech stocks are reasonable, and there’s a lot of new capital spending under way,” says Barton Biggs, managing partner of the hedge fund Traxis Partners.

Austin is absorbing some of that capital. The city, home to a growing number of energy and IT start-ups, will add 45,000 jobs this year and next, says Austin economist Angelos Angelou. Rackspace, a cloud-based IT-services host–a vast garage for parking data–hired nearly 800 new employees in 2011. Apple, too, announced an expansion that will add 3,600 jobs.

The Road to Real Recovery

The big question is whether boomtowns like Austin are mere islands while job growth remains underwater elsewhere. Unemployment figures show that aside from manufacturing, a lot of the major job growth is in such sectors as health care and tourism. This is a reminder that many of the other fastest-growing segments of the economy represent mainly low-wage jobs that haven’t been exposed to global competition.

And there’s still that refrigerator on our backs known as the housing market. In the past, consumers typically piled into housing after a recession, which helps power recovery and build wealth. Instead, we’re over two years into a recovery and we still need to pay down $3.7 trillion in mortgage debt just to get back to normal loan-to-value ratios, says St. Louis Federal Reserve president James Bullard.

As Warren Buffett and other sages have said, if housing recovers, the American economy will truly begin to feel like it’s in recovery. But when it does–be it a year from now, or three, or five–the problem that precipitated it will still be with us. We got into the housing mess because we used our homes like ATMs to cover up the fact that neither incomes nor jobs have grown as much as they should have in the past two decades. It was a myth we all bought into, from the policymakers who pushed the idea of an ownership society fueled by debt to interest-rate-lowering central bankers who kept the music playing to individuals who took the mortgages they knew they couldn’t afford.

All that is over now–there are no tools left to goose the economy falsely to life. So we’re back to the big, fundamental challenges to turn this expansion into something more robust: improving education, bridging the skills gap, churning out a new labor force that can really compete at a global level, simplifying the tax code and making sure our regulations are as streamlined, and smart, as they can be. Every true boom in this country has been preceded by a burst of job-creating innovation. As the record profits and global expansion of companies like Apple have shown, there’s plenty of innovation still happening in America. The trick is to create an environment that ensures that the jobs that come from it stay here too.