Economy tiptoeing toward recovery

A growing chorus of economists and government officials -- including President Obama -- has declared that the economy is turning the corner and the end is near for the current recession.

But is there sufficient economic evidence to justify that conclusion?

Mark Hoonsbeen, principal of Minneapolis-based Nicollet Financial Management, believes the signs of recovery are still too murky to make an accurate assessment, while Keith Tufte, president of Eden Prairie-based Longview Wealth Management, thinks the recession is in its final stages.

"Economic growth is now much better than the negative 5 to 6 percent we experienced over the winter," Tufte says. "I expect economic growth will swing to positive numbers in the current quarter."

Although Hoonsbeen also sees some hopeful trends, he believes there are still some areas of concern -- particularly in commercial real estate. "That is a potential area of weakness. Commercial real estate spending has continued to decline."

While the recession began more than a year ago as a crisis in the financial sector, a dramatic drop in business spending exacerbated the downturn. Business spending declined 32 percent from the third quarter of 2007 to the second quarter of 2009 -- compared with only a 2 percent decline in consumer spending for the same period. But shrinking inventories may soon prod businesses to crank up production.

"We've seen significant declines in inventories the past five quarters," Hoonsbeen said. "Business may soon have to start producing again to replenish inventory, which could be a source of marginal strength going into the second half of this year."

But, while manufacturers may ramp up production, there's no guarantee consumers will loosen the grip on their money. "There's nothing on the consumer side that indicates that there has been a rebound in spending," Hoonsbeen said. "They are still very cautious."

Sales trends so far this year have been mixed. Although durable goods orders were up at an annualized rate of 3.9 percent the first quarter of this year, they were down slightly in the second quarter. Nondurable goods sales were up 1.9 percent in the first quarter but dropped 2.6 percent in the second quarter.

"In the past, consumers have always returned to their previous spending patterns, but this time it could be different," Hoonsbeen said. "The baby boomers are moving toward retirement, and people do tend to change their spending habits when they reach that stage. In addition, people no longer have the equity in their homes they can use for spending, and banks may not be willing to lend them as much as they have in the past. If the baby boomers really have downsized their spending, the rate of growth coming out of this recession will be lower than in the past."

Economic stimulus

The other component of the economic recovery -- the government stimulus plan -- has been a no-show so far, according to Hoonsbeen. "Federal government spending year-over-year has increased $61 billion, but most of that can be attributed to defense spending, which has increased by $49 billion. There has not been significant stimulus spending this year. That will probably come next year, prior to the elections."

Initiatives having an impact

Although there are still concerns about the inflationary impact the massive spending would bring -- and on the ability of the government to pay off the debt from the stimulus package -- an injection of nearly a trillion dollars into an already recovering economy should be a major contributor to the rebound.

Tufte believes that government initiatives have already had an impact. "The 'cash-for-clunkers' program has been working, and the lowered interest rates for home buyers has helped improve the housing market," he said.

In fact, Tufte believes the improving housing market is a vital key to the recovery. "Housing led us into the recession, and maybe housing will lead us out. The inventory of houses for sale continues to shrink, and the price of housing has stopped dropping in most parts of the country. The housing industry is typically a leading indicator for the economy."

The psychological impact of the recession has also begun to ease, Tufte contends. "Six months ago, people and businesses were hunkering down and worried about the recession becoming a depression. We're no longer concerned about that."

Tufte expects manufacturing production to increase as inventories drop to bare-bones levels. Increased production should mean more jobs. "We haven't seen any signs of renewed hiring yet, but employment is a trailing indicator -- it's the last thing to improve -- but we have seen a slow-down in massive layoffs by businesses."

Although certain areas of the economy remain sluggish, Tufte believes the recent stock market rally and some improving economic trends have provided a big emotional boost for consumers.

"The depression scenario is now off the table. I think that going from fear of Armageddon to a more normal outlook is really quite an improvement," he said.