Signs of an economic recovery

The economy appears to have hit bottom and should begin to grow again by year’s end, Federal Reserve Chairman Ben Bernanke told Congress this week. In his most upbeat remarks in months, Bernanke reported that consumer spending and the housing market were stabilizing and that credit was starting to flow more freely. But he cautioned that recovery would be slow and that job losses could continue into 2010. Still, he said, “we are in much better shape than we were in September and October.”

The banking crisis also appears to be easing. Early reports of the government’s “stress tests” of 19 large banks indicated that most major banks were found to be healthy. Bank of America was found to need $34 billion in additional capital, with Wells Fargo and Citigroup needing far less. Officials said the banks should be able to raise the needed capital privately, without another infusion of federal bailout money. “The banking system can handle an awful lot of stress and be okay,” said JPMorgan Chase Chairman Jamie Dimon. Wall Street responded with a rally that wiped out much of 2009’s losses.

Let’s not celebrate just yet, said The Washington Post in an editorial. “As reassuring as it is to have a few up arrows, there is a long way to go before anything resembling a sustainable recovery can be proclaimed.” Household wealth has fallen $13 trillion, or 20 percent, since the recession began, making it “unlikely that consumers could return to prior levels of spending.” What, then, will power the recovery?

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International trade, for starters, said Brian Wesbury and Robert Stein in Forbes.com. Inbound and outbound traffic is up at West Coast ports, a sign that the global economy is back in business. But the most encouraging sign is coming from a surprising place: unemployment claims. Jobless claims usually peak a month or two before the economy hits bottom—and those claims appear to have peaked in March.

The banking system remains a major worry, though, said Matthew Richardson and Nouriel Roubini in The Wall Street Journal. The stress tests’ conclusions are “too optimistic,” because they are based on assumptions about the economy that themselves were overly rosy. In truth, some big banks probably are insolvent. Unless the government shows more determination to clean up their balance sheets—and clean out management­­—we risk languishing in “bailout purgatory” for years.