Lessons from ‘80s don’t bode well for economy

WASHINGTON - The road from recession to recovery is rarely smooth, straight or short. It comes with detours, forks and even dead ends. And sometimes surprises.

While each American recession is different, most major ones end with pessimism heavy in the air.

As the U.S. economy claws its way out of the deepest downturn in decades, jobs are still being lost, consumers are jittery and banks are reluctant to resume lending, even though stocks have rallied and corporate profits seem to be slowly returning.

The bleak outlook recalls the early 1980s. A slump from January to July 1980 was followed by a brutal 16-month recession that lasted from July 1981 to November 1982. Unemployment soared to 10.8 percent. President Ronald Reagan's Republicans lost 26 House seats in the 1982 elections.

It's a bit of history that President Barack Obama and his Democratic colleagues on Capitol Hill would rather not see repeated. Right now, the odds are not with them. The party that controls the White House traditionally loses congressional seats in midterm elections, even when the economy is healthy.

Federal Reserve officials expect the jobless rate to hover between 8.6 percent and 10.2 percent next year after rising to 10.2 percent last month, and ease only to a 6.8 percent to 7.5 percent range by the end of 2012. In all, they predict it could be five years or six years before economic activity returns to normal.

In 1982, as now, headlines were bleak. Many economists were forecasting a long, anemic recovery. The usual engines of job growth seemed idled. The U.S. was losing its industrial edge to an emerging Japan. People were hoarding gold. The downturn was called the worst recession since the Great Depression.

Sound familiar?

Yet all the grim warnings turned out to be misplaced. By 1984, the economy was humming. Reagan was re-elected in a landslide. One of the longest economic expansions in U.S. history was under way, lasting for nearly two decades — with a few bumps.

Right now, economic policymakers are unsure of the road ahead and they lack a good map.

Will the recession be followed by a strong recovery, as in the 1980s and 1990s? Or will the recovery be shallow and bumpy as many economists suggest? Or will the economy, which grew at a 2.8 percent rate from July through September after four quarters of contraction, fall back into a "double-dip" recession?

Economic data are mixed and open to different interpretations. You can tell that by just listening to our leaders.

President Barack Obama, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and congressional leaders have mixed expressions of optimism with warnings of much pain ahead.

"I will not rest until businesses are investing again and businesses are hiring again and people have work again," Obama said after welcoming data that indicated the economy was growing for the first time in more than a year.

Geithner said at a recent congressional hearing that "this is a very tough economy still. ... It is going to take us a while to work through these problems."

The huge Wall Street rally since March has been good for investors. A year ago, both the economy and the stock market were in free fall. The stock market is usually a great economic forecasting machine. But bad economic news can make stocks rise because it signals that the Fed will keep interest rates low.

Manufacturers are becoming profitable again. So far, however, they are doing so by cutting jobs and not replacing workers.

The housing market is showing signs of life. But one in four U.S. homeowners owes more on his or her mortgage than the properties are worth. And a gathering storm of commercial real estate foreclosures could deal another major blow to the financial system.

With the holiday season under way, consumers do not appear to be reaching for their wallets. Consumer spending makes up two-thirds of the economy.

"I think the most prudent and appropriate forecast is that the economy is going to be a slog, at least through much of next year," said Mark Zandi, head of Moody's Economy.com and a regular adviser to congressional Democrats.

While those preaching doom and gloom may be overly pessimistic, "There really are good reasons to be cautious as to how quickly the economy is going to come back," Zandi said. He contends another government stimulus program is needed, a subject expected to come up at a White House jobs forum on Thursday.

In a global economy, many factors can affect the U.S. recovery formula. Even the unfolding debt crisis in the Persian Gulf emirate of Dubai roiled markets around the world.

As in previous recessions, some parts of the country seem to be coming out of it quicker than others. Alan Berube, research director of the Brookings Institution's Metropolitan Policy Program, said the best-performing areas are in the country's midsection, from Texas up to the Dakotas; the worst are the housing "bubble markets" in the West and in Florida.

"Unlike most recessions, everywhere has suffered to some extent — just not by the same degree," Berube said.

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