Issue of the week: What does the stock rally tell us?

The Dow Jones industrial average’s surge above 9,000 marks the unofficial end of the great financial panic of 2008, said Douglas Hanks in The Miami Herald. The last time the stock average passed 9,000 was on the way down—in January, amid a terrifying free-fall that pulled the index all the way down to 6,547. The climb back was swift, with the average rising 38.5 percent in little more than five months—the fastest rebound since 1975, when the U.S. was climbing out of a debilitating recession. To be sure, the Dow is still 20 percent below its level of 12 months ago, “before Lehman Brothers failed, Fannie Mae and Freddie Mac were rescued, and Washington raced to prevent a global collapse in the banking system.” But the landscape looks much different today. “The economy has shed the panic” that made buying stocks seem foolhardy, and most economists see growth resuming by the end of the year. “It wasn’t clear we were going to escape,” said University of Florida economist David Denslow. “We’re much more secure now.”

Tell that to the millions standing in unemployment lines, said Catherine Holahan in Moneycentral.msn.com. The supposed recovery that economists and investors are celebrating “could have little to offer most Americans.” Of the 6.5 million jobs lost in the recession, a little more than half have disappeared since the first of the year. With so many recent job losses, the unemployment rate is likely to stay stubbornly high long after economic growth resumes. Most businesses will remain wary of hiring until gross domestic product growth hits 2.5 percent or more. “They are going to use every other thing they can to raise output first,” said economist Brian Bethune of IHS Global Insight, “and start hiring last.”

That strategy might help individual companies, said Robert Cyran in CNNmoney.com, but it will both slow the recovery and make it modest when it arrives. Cutting payrolls to the bone does wonders for profitability in the short term—witness the positive second-quarter earnings posted by many companies in the Standard & Poor’s 500-stock index, including Ford, Intel, and Apple. “Yet the foundations of a sustainable recovery look shaky.” Consumers can’t spend if they don’t have incomes, and consumer spending drives two-thirds of the economy. So high unemployment probably means “lower sales of everything from clothes to power plants.”

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Such pessimism may seem logical, but there’s actually little historical evidence to support it, said Paul Ormerod in the Financial Times. Recessions rarely last longer than two years, “and most recoveries, once they start, are strong.” This pattern holds true even for severe recessions, like the current one, in which the economy contracts by more than 6 percent. It’s also worth noting that some of the commentators and economists who are sounding so downbeat about the recovery had earlier underestimated how far the economy would fall. “Are these same forecasters now too pessimistic about recovery?”