From the Globe and Mail:

While the United States recently reported 3.5 per cent GDP growth in
the third quarter, suggesting that the most severe recession since the
Great Depression is over, the American economy is actually much weaker
than official data suggest. In fact, official measures of GDP may
grossly overstate growth in the economy, as they don’t capture the fact
that business sentiment among small firms is abysmal and their output
is still falling sharply. Properly corrected for this, third-quarter
GDP may have been 2 per cent rather than 3.5 per cent.

The story of the U.S. is, indeed, one of two economies. There is a
smaller one that is slowly recovering and a larger one that is still in
a deep and persistent downturn.

Consider the following facts. While America’s official unemployment
rate is already 10.2 per cent, the figure jumps to a whopping 17.5 per
cent when discouraged workers and partially employed workers are
included. And, while data from firms suggest that job losses in the
past three months were about 600,000, household surveys, which include
self-employed workers and small entrepreneurs, suggest a number above
two million.

Moreover, the total effect on labour income – the product of jobs
times hours worked times average hourly wages – has been more severe
than that implied by the job losses alone, because many firms are
cutting their workers’ hours, placing them on furlough or lowering
their wages as a way to share the pain.

Many of the lost jobs – in construction, finance, and outsourced
manufacturing and services – are gone forever, and recent studies
suggest that a quarter of U.S. jobs can be fully outsourced over time
to other countries. Thus, a growing proportion of the work force –
often below the radar screen of official statistics – is losing hope of
finding gainful employment, while the unemployment rate (especially for
poor, unskilled workers) will remain high for a much longer period of
time than in previous recessions.

Consider also the credit markets. Prime borrowers with good credit
scores and investment-grade firms are not experiencing a credit crunch
at this point, as the former have access to mortgages and consumer
credit while the latter have access to bond and equity markets.

But non-prime borrowers – about one-third of U.S. households – do
not have much access to mortgages and credit cards. They live from
paycheque to paycheque – often a shrinking paycheque, owing to the
decline in hourly wages and hours worked. And the credit crunch for
non-investment-grade firms and smaller firms, which rely mostly on
access to bank loans rather than capital markets, is still severe.

Or consider bankruptcies and defaults by households and firms.
Larger firms – even those with large debt problems – can refinance
their excessive liabilities in or out of court, but an unprecedented
number of small businesses are going bankrupt. The same holds for
households, with millions of weaker and poorer borrowers defaulting on
mortgages, credit cards, auto loans, student loans and other consumer
credit.

Consider also what is happening to private consumption and retail
sales. Recent monthly figures suggest a rise in retail sales. But,
because the official statistics capture mostly sales by larger
retailers and exclude the fall by hundreds of thousands of smaller
stores and businesses that have failed, consumption looks better than
it really is.

And, while higher-income and wealthier households have a buffer of
savings to smooth consumption and avoid having to increase savings,
most lower-income households must save more, as banks and other lenders
cut back on home-equity loans and lower limits on credit cards. As a
result, the household savings rate has risen from zero to 4 per cent of
disposable income. But it must rise further, to 8 per cent, in order to
reduce the high leverage of the household sector.

To be sure, the U.S. government is increasing its budget deficits to
put a floor under demand. But most state and local governments that
have experienced a collapse in tax revenues must sharply retrench
spending by firing policemen, teachers and firefighters while also
cutting welfare benefits and social services for the poor. Many state
and local governments in poorer regions are at risk of bankruptcy
without a massive federal bailout.

Moreover, income and wealth inequality is rising again. Poorer
households are at greater risk of unemployment, falling wages or
reductions in hours worked, all leading to lower labour income, whereas
on Wall Street, outrageous bonuses have returned with a vengeance. With
the stock market rising and home prices still falling, the wealthy are
becoming richer, while the middle class and the poor – whose main
wealth is a house rather than equities – are becoming poorer and being
saddled with an unsustainable debt burden.

So, while the United States may technically be close to the end of a
severe recession, most of America is facing a near-depression. Little
wonder, then, that few Americans believe that what walks like a duck
and quacks like a duck is actually the phoenix of recovery.

Nouriel Roubini is professor of economics at New York University’s Stern School of Business and chairman of RGE Monitor.