The U.S. economy at mid-year shows increasing signs that the recession has bottomed out and a weak recovery has begun. Factory orders are up, the average workweek is lengthening, consumer confidence shows cautious optimism and corporate profits are on the way up. Yet, by postwar standards, this will be no dramatic bounce-back. Gross national product and individual income are expected to rise at a rate only half as large as normal.
By far, the largest drag on the economy is the huge pile-up of debt -- private, corporate and public -- that occurred during the 1980s. Combined with severe troubles in the financial sector, it creates a real shortage of capital that will moderate the recovery -- if, in fact, a recovery occurs. In addition, states and local subdivisions are under great pressure to increase revenues to make up for a decline in funding from a federal government so awash in interest costs that its share of GNP is still growing larger. The result: higher taxes overall at the expense of individual spendable income.
A year ago, the definition of a contrarian was an economist who predicted a recession. Most observers, in defiance of the law of gravity, thought the credit-card prosperity of the Reagan era would go on forever. What went up didn't necessarily have to come down. Today, common wisdom decrees that what goes down has to go up. There are contrarians out there, however, who feel the current spurt of mild optimism is nothing but a bear trap, with a renewed downturn or just plain, flat, muddling along at a low level the more likely prospect.