Federal Reserve Continues to Push Against Inflation but the Labor Market Is Pushing Back

Two months into the new year, consumers are spending less, economic growth has slowed, the inflation rate has declined (although arguably not as much as the Fed would like), and the over-heated housing market has cooled.

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Like an audience in search of a happy ending, economists and industry analysts are pointing to an accumulation of positive statistics as evidence that the nation’s longest and most painful downturn since the Great Depression is finally ending. But if this is in fact, the recession’s final act, it promises to be a long one. Even the optimists (still a relative term) are predicting that job losses, curbs on consumer spending, charge-offs for financial institutions and a poor climate for manufacturers and retailers will likely continue well into next year, even as the economy begins what most predict will be a slow and far from robust recovery.

As the steepest downturn since the Depression begins to yield, slowly, to signs of recovery, economists, who had been focusing on whether the downturn has ended, are now debating how the recovery will unfold: Will it be a “normal,” robust, v-shaped recovery, with an upward trajectory almost as steep as the downturn? Or are we facing what some are calling a “new normal” — a recovery redefined by prolonged, persistent unemployment and reshaped by a profound, long-term shift in consumer psychology?

As Bob Dylan noted many years ago, “You don’t have to be a weatherman to know which way the wind is blowing.” You also don’t have to be a banker today to know that consumers are furious about overdraft fees and to see that Congress and federal banking regulators are going to do something about them.

Putting the best face on the subprime crisis, multi-billion dollar losses, inflation risks recession fears, and other equally distressing headlines dominating the financial news today, you might conclude that these are certainly interesting times. But then, you might also recall the old Chinese curse: “May you live in interesting times,” which tells us that interesting times are also often unpleasant and almost always uncomfortable.