Economy's recovery caught between opposing forces

— -- Economists may have finally learned CEOs' first rule of dealing with Wall Street: It's better to underpromise and overdeliver.

For the past two years, forecasters have overpromised, as bullish predictions for 2010 and 2011 fell short. Last year's hoped-for recovery soon faded in the fallout from Japan's earthquake, coupled with Washington's flirtation with defaulting on the national debt.

Heading into this year, economists all but unanimously predicted a first-half slowdown that would keep unemployment near 8.5% through the election.

Fortunately, so far this year they've been wrong again.

Fed Chairman Ben Bernanke will discuss the Fed's outlook today after the Fed's policymaking body ends its two-day meeting. On Friday, the government is preparing to report first-quarter growth, which is expected to beat most economists' estimates from three months ago — maybe as high as 3%, says Diane Swonk of Mesirow Financial, who had predicted only 1.9%. Joblessness is at 8.2%, and USA TODAY's 50-member panel of economists forecasts it will reach 8% by year's end.

As the recovery finally puts down what appear to be stronger roots, it faces one big force that could strengthen and reinforce it — and an even bigger one that threatens to derail it.

Coming down the track from one direction is the bullish force of pent-up demand — especially the potential buying power of households that haven't been formed since 2008 as the recession and its aftermath forced young people to double up, not move out of relatives' homes or not get married.

In the other direction is another Washington-induced showdown: a locomotive of expiring tax cuts and spending reductions set to take effect Dec. 31 that forecasters think could shave 3.5% off the economy next year — in essence, negating all of its 2012 growth and then some — if the election doesn't produce a clear direction for fiscal policy.

"People don't realize the U.S. was the only major economy in the world that improved last year," said Richard Bernstein, head of money manager Richard Bernstein Advisors in New York. "It's not strong, but it certainly has improved. … As we progress through this year, the fiscal cliff will be a major issue — for (financial) markets all over the world."

Running off that fiscal cliff would add more pain to what has been the most painful recession and protracted recovery in most Americans' lifetimes. The 2.5% growth economists predict for this year is nothing special but better than last year's 1.7%. The economy grew 7.2% in 1984, coming out of the next-deepest postwar downturn.

Deep wounds, long recovery

The recession was deep, and the recovery long, for the same reason, Fed Governor Sarah Raskin said in an April 12 speech. Americans got in over their heads on housing, then saw $7 trillion of home equity and 8.8 million jobs wiped out by the housing bust and its aftermath. Consumers have also been slow to resume spending because they have so much debt left over from the housing bubble, said Carmen Reinhart, co-author of This Time Is Different, a 2009 book that argues recoveries from downturns caused by financial panics are always protracted.