Several recent surveys suggest that a majority of the American public believes we are still in recession. Although the statistical evidence indicates the economy emerged from recession beginning in July 2009, many people likely haven’t felt much benefit.

Unfortunately, we also have passed through the time frame where we normally see the best growth as the economy emerges from recession.The decidedly pessimistic numbers also point to a significant vulnerability for the economy as we look to the second half of 2010: the question of how low levels of consumer and business confidence might affect economic growth.

During the early months of the recovery, consumer spending has been responsible for only about half as much growth as consumer spending in past recoveries. That lack of growth in spending on consumer goods reflects not only a lack of confidence, but also demonstrates that incomes are stagnant and consumers already spend a high proportion of earnings.

Moreover, the public remains concerned about: rising costs of health care and other necessities; continued high levels of unemployment and other evidence of weak economic growth; and the expectation that exploding government deficits and debt will cause future problems.


In short, even if consumers had the confidence to spend, until income growth improves, consumers probably do not have the wherewithal to contribute as significantly to economic growth as they have in the past.

Corporate profits are up, and cash on balance sheets stands at high levels — yet businesses have not been spending. From inventory to payrolls, there is evidence of a decided reluctance to spend. In part, this may reflect the fact that larger manufacturing firms have been the primary beneficiaries of growth we’ve seen over the last year.

That contrasts with recent years where smaller, service-oriented businesses benefited more significantly and were the primary drivers of job growth. Smaller firms have clearly not done as well over the last year.

Consequently, especially among smaller businesses, surveys of business owners suggest they worry about low sales or that the improved sales they have seen over the last year will not last. As we enter the part of the economic cycle where growth naturally slows, that worry may intensify.

Interestingly, the strikingly consistent second worry in surveys of business owners is uncertainty about tax rates and the costs that other government policies will impose. It seems clear that taxes must rise, and many businesses believe they may be asked to shoulder a significant part of that load.

The new health care bill and a variety of other new regulations could also mean higher costs for businesses.

So until businesses can define their cost structure, they cannot know what they would make on new investment. Under these circumstances, we would expect businesses to remain very cautious about expanding until tax rates and other mandated costs become clearer.


There are some bright spots in the outlook.

Exports, especially to emerging markets like China, have helped generate U.S. growth over the last year.

Admittedly, Chinese authorities have slowed the growth rate of their economy to quell a speculative real estate bubble. The slowing rate of growth in the economies dependent upon China will affect economic growth in the United States as well.

Yet over the longer term, the Chinese economy should reaccelerate, and that should help improve U.S. growth. The fiscal austerity needed in many of the world’s industrialized countries may restrain global economic growth, but the developing economies of the world should provide a strong foundation for continuing economic growth.

Certainly, this economic recovery has not been strong. And we anticipate this will remain an anemic growth cycle. Nonetheless, despite severe problems in housing markets and with employment, the gross domestic product statistics show the economy has grown over the last year. And we think the economy will continue to grow in the final quarters of this year and in the early quarters of 2011

While the risk of renewed economic contraction has increased, it has not risen to levels that normally indicate a looming recession. Even if the economy contracted for the two successive quarters, which would officially qualify as a “double-dip” recession, we think any return to recession would be both very brief and relatively shallow.


The greatest risk to the domestic outlook may be the lack of confidence that is such a prominent feature of the current public mood. If consumers and businesses panic because of what they see in the economy, cutting back on their spending, an economic downturn could become a self-fulfilling prophecy.

Consequently, as we monitor the changes in the economic statistics in the coming months, we will also need to monitor how the public reacts.

In 1933, during what were arguably the darkest hours of this country’s economic history, Franklin Roosevelt said, “The only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

While that quote understated the legitimate, economic problems of that period, it does reflect the realization that economies can work through even serious problems – as long as the public retains the confidence required to do what is needed.

Up to this point, both consumer and business confidence have been subdued, but they have remained confident enough to spend enough to allow the economy to grow. As long as those groups retain their nerve, the U.S. economy should continue to grow modestly.And while the U.S. economy admittedly faces large challenges in the coming years, we can also draw reassurance from the fact that even the Great Depression eventually yielded to growth as the economy worked through the severe challenges of that era.