Is the recession over? Yes. No. Maybe? Why don't we just say, "It depends on whom you ask: corporations or consumers."

After all, the National Bureau of Economic Research, which is charged with officially dating the start and end of recessions, recently opted not to call it over just yet. I will leave the technical definition to NBER, which analyzes reams of data on everything from employment and production to real GDP and wholesale and retail sales.

And it's really as complicated as it sounds. For example, fourth-quarter GDP grew 5.6%, usually considered a torrid pace for a developed economy, but part of that growth came from companies drawing down inventories at a slower pace, compared with the third quarter. In other words, the growth was due in part to an accounting metric.

Instead of looking at the "output" side of the equation, or spending, I will focus on the "input" aspect, or incomes, while also addressing how it is that consumer spending has grown despite little to no increase in wages and salaries.

We essentially have a tale of two economies. Corporations are enjoying strong profit growth, while workers continue to suffer from the prolonged stagnation of real, aggregate wages and salaries. It isn't really a tale of two


economies -- rather, they are two sides of the same coin. After all, profits have largely been driven by cost cutting, not so much by revenue growth. Cost cutting means layoffs, which mean slack in the workforce, and that means workers have no bargaining power to get pay raises, which keeps labor costs down and leads to even higher corporate profits.

Let's put some numbers behind these concepts. The Commerce Department reported fourth-quarter, 2009, pretax corporate profits grew by 8% from the third quarter, and surged by more than 30% from the depressed levels of a year earlier. In the third quarter, corporate profits grew by 10.8% from the second quarter. (The Commerce data includes corporations of all sizes, public and private, not just large, publicly traded companies with well-publicized profit reports.)

While the first-quarter results aren't completely in, the earnings so far have handily beat estimates and are showing strong gains. However, I want to note that top-line growth hasn't been nearly as robust, especially when we exclude the formerly battered financial sector. In other words, when profit growth outpaces revenue growth, it comes from two basic factors: operating leverage (a passive and purely mathematical factor) and cost cutting. The profit growth looks like a recovery, but the engine of that growth leaves me skeptical.

In contrast to the strong profit growth, based on the Employment Cost Index data from the Bureau of Labor Statistics, fourth-quarter wages and salaries grew by an anemic 0.5% from the third quarter, and a mere 1.5% from a year earlier, the smallest increase on record in data going back to the 1970s. In the third quarter, wages and salaries crept up by 0.4%.

As the title of the report suggests, these are the


cost data, in other words, it measures only those with jobs. When one factors in the unemployed, one gets a different picture. Using data from the Bureau of Economic Analysis, economywide aggregate wage and salary compensation, which accounts for employed and unemployed, contracted by an annualized 4% in the third quarter and grew by an annualized 1.1% in the fourth quarter. Gains have similarly been muted this year, up 0.4% in January, month on month, and flat in February. In terms of consumers' incomes, there's nothing to be upbeat about, and we would be hard-pressed to discern a recovery.

What about the rebound in consumer confidence? Actually, while the Conference Board reports that confidence has indeed rallied from its lows, it is still loitering around levels last seen in September, 2008, during the financial collapse. Consumers are still worried about jobs, and more people continue to say jobs are "hard to get" vs. "jobs are plentiful."

On the other hand, the expectations component, which is most correlated to consumer spending, has improved noticeably. Consumers may be pessimistic about the present, but they are a bit more hopeful about the future.

That uptick in hope seems to have buoyed consumer spending, which has indeed recovered from the recession lows. In nominal terms, consumer spending, as reported by the Bureau of Economic Analysis, grew by a seasonally-adjusted, annualized 5.5% in the third quarter, and rose 4.1% in the fourth quarter; its gains in January and February continued to outpace income growth.

How, why and what does it mean? The "how" is easy. Add up the falling savings rate, government tax credits, refunds and transfer payments, along with some strategic mortgage defaults, and we get an annualized $480 billion, or 4.4% of disposable incomes, that can be diverted to spending. We do know consumers aren't taking on more debt to fuel their spending, since consumer credit (non-mortgage debt) steadily contracted for more than a year, as borrowers either paid down or defaulted on their credit-card, auto and other loans. A recovery? Yes. Sustainable? No.

The "why" is more important. On the one hand, it's simply an issue of pent-up demand. Your car breaks down and you need a new one. Sooner or later, you will get that haircut you've been putting off. You want to splurge one night for dinner and a movie. Whatever the reason, people eventually want, and need, to spend again. On the other hand, it's a bit of a gamble if the spending is based on unrealistic expectations for the future. Reducing the savings rate isn't a sustainable source of economic growth, but it can ignite a spark.

It doesn't really matter whether the chicken or the egg came first. The important thing is that, given the one, the other can't be far behind. If consumers are spending, eventually companies may start hiring, and real incomes may begin growing again.

On the news recently, for example, I heard that

General Motors

will add 1,600 jobs to keep up with demand. That's a good start, and with news of new jobs, instead of layoffs, consumers may become less fearful and open their wallets a little more. Thus, the vicious circle of recession may become a virtuous cycle of recovery.

Gene Balas has 20 years experience in investment management and is a Chartered Financial Analyst. He most recently was director of investments at Genworth Financial Asset Management. In this role, he performed forecasts on macroeconomic conditions and determined the influences of thematic drivers to develop the appropriate investment strategy. Prior to GFAM, Balas was director of investment management and guidance at Merrill Lynch, where he advised pension funds, endowments and foundations as to appropriate investment strategy. Balas received a bachelor's degree in business administration in finance from the University of Houston and a Master of Business Administration degree from Columbia Business School.

To contact Gene, please email