America's economic recovery in the wake of the Great Recession has been lousy — undeniably so. By multiple measures, including inflation-adjusted GDP growth, unemployment, and the pre-recession long-term growth trend, this has easily been the weakest recovery since the Second World War.
That is now changing. There are many signs that the slump is over, and the recovery is real.
First, there's the rapidly falling unemployment rate — which has plummeted to 6.1 percent, the lowest since September 2008. The number of long-term unemployed Americans is falling rapidly. Business sentiment is rising. Consumer confidence is rising, and credit markets — a key signal of economic confidence — are expanding again. U.S. home prices are rising, too, albeit at a slower rate than last year. And stock markets continue to smash records, illustrating a broad confidence among investors.
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Plus, by adding 288,000 jobs in June, the U.S. has finally regained all the jobs it lost in the Great Recession and its aftermath.
All of this evidence strongly suggests that the steep GDP drop in the first quarter of this year was a blip related to the unseasonably bad weather and firms drawing down inventories, rather than being symptomatic of deeper problems.
And yet, naysayers on both sides of the debate remain unconvinced of the strength of the recovery.
The hawks distrust the recovery — and not just because they are predominantly Republicans who oppose the Democrat in the White House. They argue that the recovery has been artificially engineered through the Federal Reserve's ultra-low interest rate policy and asset purchase programs. These programs have instilled artificial confidence in the economy and in investors, hawks say, and cannot be sustained. They fear that once these programs end, the economy will crash once again.
This is a facile argument. Investors, businesses, and consumers aren't stupid. They haven't regained confidence simply because the Fed snapped its fingers. For the first two or three years of the recovery, confidence remained in the pits, even with the ultra-low interest rates and other stimulus measures. The point of monetary stimulus is not to trick people into believing that everything is a-okay. That wouldn't work. The point is to create conditions where the sentiments of consumers, businesses, and investors can recover organically because the economy legitimately is recovering. Plus, the Fed is already drawing down its stimulus. Job creation is still going strong. The recovery is self-sustaining.
The criticism from the doves is more substantial. They argue that an overly cautious Federal Reserve and an austerity-obsessed Congress have hampered the recovery. And although we don't know for sure how things would have turned out in a parallel universe where fiscal and monetary stimulus had been bigger, the slow rate of recovery and prolonged high unemployment suggest that this is a valid criticism. The doves consequently argue that even with the recovery beginning to look stronger, the stimulus shouldn't be curtailed yet.
I agree that it is definitely better to overshoot than undershoot, and that the Fed should be ready to introduce more and stronger stimulus if the economy begins to flag and unemployment begins to rise. The costs of overshooting would be a little inflation — which would actually help businesses and consumers still struggling with heavy debt loads. The danger of undershooting would be falling back into a deflationary depression, as Japan has done multiple times over the past 20 years, and as the eurozone appears to be doing today.
But here's the thing: The undershooting/overshooting debate appears increasingly irrelevant. The structure of the U.S. economy has shifted dramatically to adapt to the new realities of the post-2008 world, and this should drive stronger growth this year and in years to come. Last year the U.S. overtook Saudi Arabia to become the world's number one producer of oil, and it is on course to overtake Russia as the world's number one energy producer in 2015. The U.S. is home to world-leading tech firms like Google, Facebook, Intel, IBM, Amazon, Microsoft, and Tesla, each of which is pioneering a vast array of new productivity-increasing technologies.
Look at Google's driverless cars. Look at the smart grid and the falling cost of solar energy, which is on track to become cheaper than fossil fuels in the next five to ten years. Look at the vast array of advances in technologies like robotics, artificial intelligence, and 3-D printing. Look at the revolutions in genomics and diagnostics that are paving the way toward an era of personalized medicine. Look at the millions of smartphone and tablet apps that have been created in the past five or six years.
Buckle up, America: It's going to be one heck of a ride.
