Washington -- Why is the current recovery so stubbornly sluggish?
"Usually the economy jumps off the bottom [of recession]. We are really seeing a very slow momentum," said John Tuccillo, senior economist with the National Association of Realtors.
Three core elements are to blame: economics, politics and demographics. In no previous recovery have these three influences combined so powerfully to brake the speed of a comeback. They are expected to hold the annual economic growth rate to around 3 percent this year, half the typical pace of recoveries after previous post-World War II recessions.
"I am gearing my operation to the premise that what we have is what we are going to have," said John Pohanka, chairman of Pohanka Automotive Group, a Washington-based dealership with 13 franchises for domestic and imported autos. "I do not expect any great upsurge in sales."
Unless consumers suddenly shrug off their cares about debt burden and job security and go on an unexpected and wild spending spree, this is set to remain the slowest and most frustrating economic recovery on record.
A central economic problem: there is not much new spending on any level.
The federal government is fettered with a $400 billion deficit. State and local governments are strapped for cash. Corporate America is restructuring, cutting costs and work forces. Consumers are still catching their financial breath after splurging on borrowed money in the 1980s.
The federal deficit reduces government's flexibility to spend money on promoting growth. It also keeps long-term interest rates high. One of the main frustrations of this recovery has been the failure of long-term interest rates, crucial in setting mortgage rates, to match the decline of short-term rates. This has kept capital expensive, particularly weakening the housing recovery.
David Olson, president of his own research company in Columbia and a specialist in the mortgage market, said long-term rates historically have been 3 points above inflation. On that basis, with inflation currently hovering between 3.5 percent and 4 percent, long-term rates should be 6.5 percent or 7 percent. They are closer to 8 percent.
One reason, Mr. Olson said, is that the Germans and Japanese, facing their own economic troubles, are no longer as interested in financing the U.S. debt. Domestic savings here can't make up the difference, so rates stay high.
Several other factors are at play in making the housing and construction recovery weaker than usual. The housing recession was comparatively shallow, limiting the pressure of pent-up demand.
"In most respects it was relatively milder than usual recessions. The pent-up demand for housing was not nearly as great as it usually is," said Mark Obrinsky, senior economist with the Federal National Mortgage Association.
When housing starts, which had shown signs of recovery in the first three months of the year, suddenly foundered with a 17 percent drop in April, it was a somber reminder of how fragile the recovery is. The day before the housing report, President Bush observed, "As housing goes, so goes the economy."
Commercial and retail construction is in even worse shape. The overbuilding of the 1980s has left most city centers with surplus office and retail space. Baltimore, according to the Baltimore Development Corp., has an office vacancy rate of 20 percent and 250,000 square feet of surplus retail space. This means a lot of slack has to be taken up before new construction will be needed.
Baltimore's downtown situation is complicated by this year's scheduled delivery of 450,000 square feet more office space in the Commerce Place Building, only about a quarter of which has been leased. An additional 200,000 square feet will be added when CSX Transportation moves the last of its headquarters jobs from 1 Charles Place to Jacksonville, Fla.
"Companies are not experiencing the growth of prior years, but we have space that continues to be built," said Andrew Chriss, head of brokerage for Manekin Co. commercial realtors. "I believe the submarket of downtown Baltimore will be one of the slowest to return to what we view as normalcy."
Even the much-touted peace dividend appears, to some, to have the luster of fool's gold. The defense cutbacks mean fewer jobs in the military and defense-related industries.
"In the short-term, that puts a negative shock on the economy," said Rudolph Penner, director of economic studies at KPMG Peat Marwick. "By the short term, I am referring to two years. It's a long short term. In the longer run, it releases those resources and we will absorb them into more socially productive activities."