RTTNews - That the economy has yet to completely turn the corner is clear, says economist Joel Naroff. First quarter growth was as weak as the last quarter of 2008. Job losses are in the stratosphere and the nation's unemployment rate is at a 25-year high. Nevertheless, the talk is all about whether the recession has ended. While there are an enormous number of challenges ahead, the worst may be behind us. Unfortunately, the recovery may take years and be a lot slower than in the past.

So, where do we stand? Well, the data we got this month were not very good. The economy declined by more than 6 percent during the early part of the year, a truly awful pace. The labor market remained a disaster as payrolls slipped by 539,000 in April and the unemployment rate just missed hitting the 9 percent level. In addition, Chrysler went bankrupt and there is a good chance GM will follow.

If taken by themselves, the economic reports should have provided no hope. But everything is relative and what we have started getting consistently is what I call good, bad reports. The payroll numbers were distressing but job losses slowed. So that's now considered good. That positive spin was used on a number of other reports as well.

The fact that we have started seeing the silver linings in some very dark clouds tells me psychology is changing dramatically. Worries about a never-ending recession have been replaced by hopes that better times are near. Because I have been arguing that confidence is the key to ending the recession, the upswing in outlook is the most optimistic development that could have occurred.

If indeed the recession may be ending, what will the recovery look like? Here, I have a lot of concern. There are many reasons to think that getting out of the economic mess we are in will take years. The Federal Reserve will have to increase the historically low interest rates quite quickly to prevent a major bout of inflation and the rising rates could moderate the expansion.

The federal government faces major challenges. The budget deficit is approaching $2 trillion. The interest costs on the borrowings needed to cover the government's expenditures are large and will accelerate when rates rise.

Changes in the financial sector could also restrain growth. Banks still need to rebuild their financial bases and that will not happen over night. They are likely to start easing credit, but moving back toward what will ultimately become normal credit conditions could take several years.

But maybe the most important reason that growth over the next decade is likely to be modest is that the past two decades were essentially driven by bubbles. In the 1990s, it was the tech bubble that hyped business growth and household spending. In this decade, it was the housing bubble. But the dot.com bubble burst and the house is no longer an ATM machine. We will have to spend our income, not transitory wealth created by surges in financial assets or real estate.

The economy may be turning and growth could reappear soon. But the rate of expansion may be more like the 1980s, when 2.2 percent was considered solid, not the last 20 years when we expected increases closer to 3.5 percent. This back to the future economy may be welcomed relief though, if we don't have to live through another boom followed by a major bust.

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