Recession Nips At The Heels Of A Slow-Poke Recovery

The Labor Department announced last week that the U.S. economy grew by just 103,000 jobs in September. A number like that isn't even enough to keep up with population growth. The fact that the report was widely greeted as positive news suggests just how low expectations have sunk this year.

Since January, the U.S. economy has been hit by a series of external shocks that brought a modest recovery nearly to a halt. The slowdown, however, may have been under way even before the shocks took place.

As recently as last January, President Obama could still sound a note of cautious optimism about growth: "The economy added 1.3 million jobs last year, and each quarter was stronger than the previous quarter, which means the pace of hiring is beginning to pick up."

Fast forward to last week, when the president seemed much gloomier about the economy's prospects: "With respect to the state of the economy, there is no doubt that growth has slowed. I think people were much more optimistic at the beginning of the year."

This deceleration in growth has been as sudden as it was unexpected. During the second half of last year, growth was nearly 3 percent. By the first half of this year, it had fallen to almost 1 percent. An economic recovery seems to have come and gone before most Americans even realized it was here.

"We've had a new slowdown that began roughly in the second quarter of 2011," says Lakshman Achuthan, who heads the Economic Cycle Research Institute. "This time that downturn in growth has continued all the way to the onset of a new recession."

Economists generally point to several events to explain why growth has slowed.

The Japanese earthquake in March left that country's manufacturing base in tatters. American and European factories shut down when they couldn't get the parts they needed from Japan.

"People sometimes forget that Japan is still the rest of the world's second largest economy, and so a tragedy and disaster that shuts down almost all of Japanese manufacturing for a long period of time has an enormous impact worldwide," says former Federal Reserve board member Randall Kroszner.

Then came the Arab Spring with its inspiring images of protesters seizing the reins of power from autocratic rulers.

"The movement was a victory for democracy," Kroszner says, "but it generated a great deal of uncertainty about oil production, and so oil prices went up much more significantly than anyone had expected."

More recently, Kroszner says, the debt crisis in Europe has left a lot of investors worried about the exposure of U.S. financial institutions, and stock prices have tumbled.

But Achuthan, for one, is skeptical about how much of a role these events played in the slowdown. He says until late last year the leading indicators for growth were all pointing higher.

"Then the economy began to slow again, and this is something we saw coming," Achuthan says. "It was happening in the context of a global industrial slowdown, where industrial activity worldwide was decelerating."

In other words, he says, the American economy fell victim to cyclical forces. Europe was slowing down. Emerging nations like China took steps to fight inflation by cooling their economies. So the surge in demand that occurred after the 2008 financial crisis petered out by last December — well before the Arab Spring or the Japanese earthquake.

"One way to think about it is, maybe some of the headwinds that have been concerning us — like the weakness in the financial sector, problems in the housing sector — some of these headwinds may be stronger and more persistent than we had thought," said Federal Reserve Chairman Ben Bernanke, who took note of the new reality this summer.

And this downturn is taking place at a time when the unemployment rate remains 9.1 percent. Consumer confidence is still very low. The U.S. economy is having to contend with another slowdown before it has really recovered from the last one.

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