Expert: Despite Mixed News, Economy In Recovery

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GUY RAZ, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Guy Raz.

We begin the hour with a simple question: If the economy is starting to crawl back from the brink, why are so few Americans feeling the benefits?

The stock market is up more than 50 percent just since March, and yet unemployment is expected to hit 10 percent at any moment, and things are far worse in places like California and Michigan, still very much in the grip of the economic crisis.

Joining us to help make sense of this weird financial landscape is Lakshman Achuthan. He's the head of the Economic Cycle Research Institute and one of the few analysts who warned about the coming economic crisis early last year.

Mr. Achuthan, welcome to the show.

Mr. LAKSHMAN ACHUTHAN (Managing Director, Economic Cycle Research Institute): Well, thank you.

RAZ: Why is the stock market doing so well? Is it connected in any way to the economy?

Mr. ACHUTHAN: Let's be clear. It is not a measure of economic activity. However, it is closely connected to the economic cycle. And what I mean is it anticipates upswings and downswings in economic growth by a few months.

When we think about the economy as individuals, we think about, you know, how's my job doing, or how's my company doing, and that is very different from the stock market. The stock market is going to move literally a few months, maybe a quarter or two, before those kinds of things, before actual jobs start to move.

RAZ: So the market's like a bellwether, right?

Mr. ACHUTHAN: It is a bellwether, and it makes all kinds of mistakes, to be fair. It gives you these false alarms. So it's very important to see other leading indicators of the economy move alongside the rise in the stock market, and that's what's interesting about the last six months. We are seeing profits growth starting to improve. We are seeing essentially the business cycle has turned the corner. The recession has ended. It still feels bad to individuals and to businesses because we're near the bottom of the business cycle. However, the critical thing - and this is what the stock market is concerned about -we've changed direction.

You're actually seeing things like production. Factories are producing more. People are buying more. It's not even less bad anymore. What we're getting is actual expansion.

RAZ: Well, if on paper, the recession is over�

Mr. ACHUTHAN: Mm-hmm.

RAZ: �why is unemployment so high?

Mr. ACHUTHAN: Let's put this in perspective. It's because we had the worst recession since the 1930s. So, of course, unemployment's going to be up. But it's not even as bad as it might have been. In the last bad recession, it was in the early �80s - in 1981, �82 - we actually had unemployment a full percentage point higher than we have now. And it's actually entirely normal for the jobless rate to rise into the early part of a recovery.

There's two basic reasons. One is simple population growth. Every month, the population is growing so fast that you have to produce 125,000 more jobs just to tread water. And the other reason is as the economy improves, people who have been sitting on the sidelines say, you know, now, it's worth it for me to go and hit the pavement and look for a job.

RAZ: One final question for you. There is a credit crisis now, particularly for small businesses in this country, small businesses that are struggling to stay afloat. They simply cannot borrow money from banks because banks are not lending it. Why is that happening?

Mr. ACHUTHAN: Well, you know, the banks have essentially had a near-death or actually a death experience, and they've been brought back to life. So they're completely shell-shocked. They are very scared to loan money, more than even is normal. And actually, this is normal.

Typically, loan growth does not start to revive until many quarters after the recovery has begun. But I think somewhere in the next, say, one to two to three quarters, you'll start to see the loan growth back out to business again.

RAZ: Lakshman Achuthan is the managing director of the Economic Cycle Research Institute. He spoke with us from New York.

Mr. Achuthan, thank you so much.

Mr. ACHUTHAN: Thank you.

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