Ethan Harris, former chief U.S. economist at Lehman Brothers Holdings Inc., recalls packing his family photos and top research into a suitcase five years ago on the Friday before the company went under.
Anticipating he might not be able to go back to his office in New York, he exchanged phone numbers with colleagues and talked to his supervisor, Paul Sheard, who agreed it would be disastrous for markets if Lehman wasn’t rescued.
“My boss at the time said to me: ‘Well, we know it’s going to be a devastating event, and therefore they’re not going to let it happen.’ And I said: ‘Well, I don’t know; maybe they will,’ ” said Harris, now co-head of global economics research at Bank of America Corp.
While Harris’ premonition proved true — Lehman’s bankruptcy filing on Sept. 15, 2008, exacerbated the worst financial crisis since the Great Depression — the economy, with help from the Federal Reserve, has emerged from the ruins “in much better health,” he said. The U.S. is weathering federal budget cuts and higher payroll taxes, growth is picking up and some economists predict the expansion, now in its fifth year, may last longer than most.
The signs of resilience are everywhere: Households continue to spend. Businesses are investing and hiring. Home sales are rebounding, and the automobile industry is surging. Banks have healthier balance sheets, and credit is easing. All this coincides with the economy shedding the excesses of the past, such as unmanageable levels of consumer and corporate debt.
“We are in a much better place than we were five years ago,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pa. “Consumers are feeling much, much better; certainly investors are.”
Confidence is hovering around a five-year high, and the Standard & Poor’s 500 Index has climbed 80 percent since the 18-month recession ended in June 2009.
After months of political wrangling, Congress worked out a deal with President Barack Obama on Jan. 1 that let the payroll tax revert to 6.2 percent from 4.2 percent while avoiding broad-based income-tax increases. Across-the-board cutbacks in federal spending began in March.
Even with these restraints, GDP kept growing, and as their effects fade, the expansion will accelerate in the second half of 2013, according to a Bloomberg survey.
“Given how well the economy’s done in the last year, in spite of everything that’s happened in Washington, that’s a pretty good sign” of its underlying strength, said New York-based Harris, who projects a 2.7 percent growth rate next year after an estimated 1.5 percent this year and a step up to 3 percent in 2015.
Zandi’s more-optimistic forecast shows the pace almost doubling to 3.3 percent in 2014 after 1.7 percent this year and reaching 4.1 percent in 2015. A growth rate of 3 percent or more would be the best since 2005, and exceed the 2.2 percent average since the recovery began.
“As we move into next year, the better private economy will start to shine through,” he said.
The economy is showing its strength in a number of ways:
» Improving job prospects, together with rising stock and home prices, are bolstering consumer spending, which accounts for about 70 percent of the economy. Households, after recouping wealth lost during the severest recession since the 1930s, now have record net worth, and a ratio of liquid assets to cover liabilities is the strongest since 2000.
Americans’ finances are in the best shape in decades and they’re ready to borrow again as credit conditions thaw, signaling the start of a “stronger growth phase,” said Joseph Carson, director of global economic research at AllianceBernstein LP in New York.
» Banking, which bore the brunt of the Lehman collapse, has come a long way, helped by higher standards in the 2010 Dodd-Frank Act and by supervisory prodding. Regulators have been compelling banks to retain earnings and reinforce their buffers against possible losses, and new international and domestic rules are prompting stronger capitalization.
The 18 largest U.S. banks had more than doubled one measure of capital at the end of 2012 compared with the end of 2008, and 17 of the 18 had enough funds to withstand a deep recession, according to Fed analysis this year.
» Residential real estate, rebounding from the subprime-mortgage meltdown that triggered the credit crunch in 2007, is “out of the bubble-bursting period,” and poised for further gains, said Robert Shiller, a Yale University professor and one of the creators of the S&P/Case-Shiller Index of home prices. “People are substantially more confident about the housing market.”
The optimism is sparking spending on remodeling. Atlanta-based Home Depot Inc., the largest U.S. home-improvement retailer, and smaller rival Lowe’s Cos., in Mooresville, N.C., each reported second-quarter profit that topped analysts’ estimates.
The number of foreclosure filings is 64 percent below the 2010 peak, and the share of seriously delinquent mortgages — those more than 90 days behind or in the foreclosure process — plunged in the second quarter to an almost five-year low, according to industry data.
» Pent-up demand for goods and services, along with the absence of many excesses that presage the start of a slump, indicates the current expansion could last another four or five years, according to some economists. That would make it almost twice as long as the average, which since the end of World War II has been 58 months, or just shy of five years.
Harris is encouraged by the transition since the Lehman collapse.
“We haven’t had very robust growth, but we’ve seen a lot of the wounds of the crisis heal,” he said. “We’re moving towards a fully healthy economy.”