This might be the worst non-recession in years.
U.S. data is pointing to an economy that is still chugging along, albeit slowly, yet consumers are behaving as if the country is in the throes of the deepest downturn in decades.
The latest figures Wednesday showed unexpectedly healthy expansion in the services sector, strong productivity gains, and private-sector job growth. Those are not exactly the hallmarks of a recession.
But at the same time, consumer confidence is at recessionary levels, and retailers are well aware that households have curbed spending on all but the essentials.
Analysts expect only slim gains when chain stores report May sales figures Thursday, despite the billions of dollars in tax rebates that have already arrived.
Even upscale department stores such as Saks are feeling the pain. Its chief executive said last month that consumers were acting as if they were experiencing a recession, whether the country was technically in one or not.
"Thanks to aggressive monetary and fiscal policy, it may not look like a recession in the conventional sense, but after a year or two we will all feel like we've just been through a recession," said Kenneth Rogoff, an economics professor at Harvard University and former chief economist of the International Monetary Fund.
Rogoff expects a protracted period of subpar growth as consumers retrench, a sort of "payback" for excessive spending in the early part of the decade. The easy credit that fueled that spree has dried up, and it will take years to rebuild the household wealth lost to the housing downturn.
"If we take declining employment, falling housing prices, rising prices for necessities like food and oil, and a distinct collapse in credit markets, no wonder consumers are feeling strapped," Rogoff said.
It's Different This Time, Really
Wall Street economists look for patterns in the data to help them decide whether the current environment is similar to past recessions. They have had a tricky time classifying this period because of the mixed economic signals.
The economy grew at a 0.9 percent annual pace in the first quarter, far better than many on Wall Street had initially feared. Yet below the surface, there were clear signs of the consumer pullback. Real final domestic demand fell for the first time since 1991, which was the tail end of a consumer-led recession.
Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business, said it will be hard to define this as a recession by the standard metrics because the structure of the economy has shifted dramatically.
In a typical recession, the manufacturing sector takes a heavy hit as production is cut, and that triggers steep job losses that reinforce the downturn.
This time, "there is no more fat left to cut" in the manufacturing sector, he said, pointing out that factories account for only about 10 percent of employment, down from more than 30 percent in the 1970s. And international demand has boosted exports, keeping U.S. factories busier than in a normal downturn.
The result is smoother business cycles with gentler declines, but also slower recoveries. In the past two recessions that ended in 1991 and 2001, it was many months before job growth resumed.
Dhawan predicts modest job losses and sluggish growth, with gross domestic product hovering within a half-point above or below zero for at least the next 18 months. It will probably be 2010 before the economy returns to trend growth of around 2.5 to 3 percent, he said.
For consumers, that suggests a lengthy period of doing without the non-essentials. Household spending will probably remain subdued until the housing market recovers, and few economists are willing to guess when that might happen.
For investors who are betting that no recession means healthy growth, there may be an unpleasant reality check coming as early as Friday, when the Labor Department releases employment figures for May.
"With employment likely falling for the fifth straight month, housing prices still in free-fall, and gas prices nearing $4 a gallon, the headwinds facing the American consumer could easily blow away the temporary boost from rebate checks, setting the stage for continued economic stagnation in the second half of the year," said Sal Guatieri, senior economist with Nesbitt Burns.