The Economy: Real or Illusory?

Gallup’s chief economist separates the fictional from the genuine -- and offers real warnings to businesses and individuals

The current economic situation would be a lot easier to accept if it wasn't totally baffling. Companies that appeared to be an inch from bankruptcy a year ago now seem to be turning enormous profits. Wall Street is booming. Goldman Sachs is getting ready to pay out record bonuses.

But Main Street businesses are struggling, and many small businesses can't get the credit they need. Consumers aren't spending. Some companies are hiring, while others are cutting jobs, hours, and wages. Still, the U.S. Department of Labor just reported the smallest job loss since the recession began and a drop in the unemployment rate from 10.2% to 10.0%. It's a "through-the-looking-glass" sort of economy -- and when economics starts resembling fiction, there might be something wrong.

You see so many contradictory things occurring right now because there's a lot of artificiality in the global economy.

And fiction is exactly what is wrong with the economy, says Dennis Jacobe, Ph.D., Gallup's chief economist. Much of the economy is based on what he calls "artificiality." This unnatural tinkering with the economy likely staved off a second Great Depression. But it also has created some false economic signals, he says, and they shouldn't be confused with reality.

For that reason, Dr. Jacobe has some words of warning, which he shares in the following conversation. These include: To survive financially right now, consumers and businesses alike need to build a "fortress balance sheet." Be wary of Wall Street as a measure of the economy -- it has become decoupled from Main Street and isn't a reliable barometer of the economy. And last but certainly not least, he forecasts that the economic environment won't genuinely be better until the middle of next year when the jobs situation should begin to improve.

GMJ: The stock market is up -- the S&P 500 has risen more than 60% since March. But November retail sales were much weaker than expected, and even after a surprisingly good jobs report, the unemployment rate is still at 10% -- and it's more like 17% if we count the underemployed and the people who've given up looking for a job.This doesn't seem to make any sense. Can you explain why this is happening?

Dr. Jacobe: The reason that you see so many contradictory and unusual things occurring right now is that there's just a lot of artificiality in the global economy. As a result, many of the economic measures and relationships that we normally depend on to forecast the future direction of the economy may not hold true in this new environment. We've just gone through the worst financial crisis since the Great Depression, and economies don't recover from that kind of thing overnight.

What led to this artificiality was that governments and monetary institutions around the world, led by the U.S. Federal Reserve, took unprecedented actions to mitigate the effects of the financial crisis. The Fed put trillions of dollars into the U.S. economy, bailing out Fannie Mae, Freddy Mac, AIG, and other financial institutions. When you factor in the actions taken by other governments in addition to the U.S. efforts, an enormous amount of liquidity was thrown into the global economy to stabilize the financial sector.

In addition, the United States has undertaken an unprecedented amount of spending, ranging from TARP [the Troubled Asset Relief Program] and the auto industry bailout to the stimulus program and expansion of the social safety net. As a result, future federal budget deficits are also going to be unprecedented for years to come. Combined, these fiscal and monetary policies have led to sharp declines in the value of the dollar, a surge in commodity prices, and even serious questions about the role of the dollar in the global economy.

All of this seems to have worked in the short term, and the world economy is much better off in terms of its financial stability than it was a year ago. But these actions created all sorts of unusual new relationships in the world economy. A lot of what we're currently seeing is more of a mirage than reality -- and people should be wary of the false signals that may have come from these emergency actions. In a sense, we've put the global economy on "steroids" -- and we know there will be long-run consequences -- but even more importantly, we know these "steroids" are creating distortions in our normal measures of global economic well-being.