"W." It's back, and sending tremors through the business community. Especially as it seems to be displacing "V."
Recall: A "V" recovery is one in which a sharp drop is followed by an equally sharp rebound. The dreaded "W" describes an economy that plunges, then recovers, luring investors into the market and businessmen into new investments, only to drop again before a final recovery, with substantial losses all around for the prematurely optimistic.
The optimism engendered by soaring share prices in the quarter just ended came to a screeching halt when the Labor Department issued a jobs report so grim that the Lindsey Group consultancy warned its clients not to read it "without a bottle of Prozac handy."
A spate of bad news followed. Factory orders down year-on-year by some 20 percent; a mortgage market functioning only because the government is guaranteeing about 80 percent of those written; consumer credit so tight that it is falling at the fastest rate since the crisis began two years ago, and credit increasingly unavailable to small businesses; Treasury Secretary Tim Geithner forced to be economical with the truth lest the dollar collapse and proclaim that a strong dollar is "very important to this country;" Goldman Sachs predicting that high unemployment will drive down wages and purchasing power.
And that's only in the short run. Longer term the position of the dollar as the world's reserve currency is under threat; America is leading the way toward growth-stifling protectionism; and economic and political power is passing from America to China, India and other emerging nations. Americans are being told to become accustomed to a sharply reduced role in the world.
All adding up to a "W". Or does it? Not certainly. For one thing, the service sector, which accounts for about 80 percent of U.S. economic activity, has moved into growth territory for the first time this year. And the manufacturing sector is growing for the second consecutive month.
For another, orders for business equipment are picking up, perhaps because businesses see signs that demand is recovering, and have cash to spend. Business Week reports that nonfinancial corporations have surplus cash flow of $156 billion, "a surfeit that allows companies to finance all of their current outlays for equipment and construction without borrowing." With the exception of one year, "that is the largest surplus on record."
Then there is the housing sector. Prices are up, as is the index of pending sales of existing homes (sale not yet closed), the latter for the seventh consecutive month. Consumer spending is showing a bit of life, even excluding the temporary jump in car sales arising from the cash-for-clunkers program, and despite declining use of credit cards.
Add to this an easing of credit markets. The default rate of speculative-grade companies has dropped for the first time this year, and the premium riskier corporate borrowers have to pay over safer U.S. Treasuries has fallen in half.
Perhaps most important of all, both because it is a forerunner of future economic activity and the indicator most watched by White House economists, is the inventory picture. Many companies have so reduced their stocks of materials and goods that they have no choice but to restock. Whether or not this trend will prove durable, setting off a restocking boom, is difficult to say. Some businessmen tell me it is, others -- these are in the "W" camp -- say it isn't.
Unfortunately, even if things are improving -- and I prefer "V" for victory to "W" for worry -- the fundamental cause of recent financial problems remains unaddressed.
Since China refuses to allow its currency to appreciate, the only way we can restore some balance to our trade with China is to let the dollar fall even more, making imports expensive, and exports of U.S. products more competitive.
There is no indication that the administration finds such a dollar decline undesirable, if it is gradual, Geithner's strong-dollar statement to the contrary notwithstanding. It is the possibility of a dollar collapse that worries some at the White House.
That would force interest rates up, aborting the recovery. Obama has no desire to face the electorate in 2012 with inflation running at Jimmy Carterlike levels, and interest rates soaring, a real possibility if he adds to the downward pressure on the dollar by increasing the flood of red ink already pouring over the nation's ledgers, as frightened congressional Democrats have been begging the president to do at White House meetings this week.
Examiner Columnist Irwin M. Stelzer is a senior fellow and director of the Hudson Institute's Center for Economic Studies.