The Nothing-Led Recovery

This morning, Wells Fargo released its weekly dispatch of economic and financial analysis, providing an outlook based on the latest jobs, consumer spending, housing and interest rate figures. The report confirmed the growing consensus that the worst is behind the U.S. economy and the chance of a double-dip recession is receding. Still, it seemed a bit queasy. ”A recovery not led by a rebound in housing and consumer durable spending and accompanied by high unemployment?” it says. “Such is the strange brew we appear to be making for this recovery.” It goes on to elaborate:

Mortgage rates are rising while many homeowners see flat prices and rising foreclosures. Unemployment rates are high and yet both monetary and fiscal policies are gearing up for moves to tighten policy. The structural excesses of too many houses and too many goods relative to demand persist as many low-skilled and semi-skilled workers see very little in their future. Indeed a very strange brew for this very atypical economic recovery.

A strange brew — but not necessarily a bad one. Indeed, to see a “typical” recovery would be worrisome, given the atypical economic fundamentals. The housing market remains fragile, with waves of foreclosures on the horizon and analysts such as Meredith Whitney predicting that prices might continue to decline. So too with consumer spending: The chance that it might “lead” the recovery should be low, given the rates of joblessness and underemployment. (And, as an aside, the United States might want to be wary of housing-led anything for some time. Robert Shiller and others have convincingly argued that the last housing-led recovery, after the dot-com bubble, was nothing but the beginning of the economically catastrophic debt-fueled housing bubble.)

If the Obama administration is betting on anything to lead the recovery, it is exports, which it hopes to double in the next five years even as international demand remains soft. But the economic fundamentals at least for now point to a nothing-led recovery, with slow, incremental gains across sectors and persistently high unemployment.