Welcome To Tim Geithner's Recovery

In economics, as in war, simply declaring "Mission Accomplished" does not make it so. Reality is stubborn. But that didn't prevent Tim Geithner from taking to the New York Times to celebrate our "recovery" in a transparent effort to gin up increased confidence.

In effect, Geithner saluted policy-makers for avoiding a replay of the 1930s, settling instead for a prolonged period of stagnation, á la Japan's Lost Decade; what PIMCO dubs the "new normal". What a salutary result! Implicit was a rebuke of those worrying about the possibility of a double-dip: after all, the economy grew at a rate of 2.4% 1.7% in the second quarter of 2010. Modest but still tangible growth, no?

Of course not. The economy is clearing slowing. The inventory bounce is fading. Fiscal stimulus is waning. Republican obstructionism eliminates any hope of further spending. Cuts at the state and local levels will actually bring about fiscal contraction over the coming months. The Fed frets that further action could spike inflation. At best, Bernanke & Co. won't withdraw the little monetary stimulus they have provided, at least in the short term. In short, the second derivative is slumping. It's conceivable that the first derivative could reverse itself over the next few quarters. But even that is largely irrelevant. Whether the economy grows at a rate of minus or positive one-percent, there still will not be enough growth to add enough jobs to alleviate our now persistently high unemployment. We have simply arrested the freefall and called it a recovery.

And there are still, of course, rather massive tail risks to our fragile "recovery". Housing in the U.S. is on a downward trend again. Europe's banking/sovereign debt problems (they are one and the same) still hover like a specter over the continent. And China's housing bubble could pop to devastating effect.

Welcome to the recovery, indeed.