05/13/2009 05:12 am ET Updated May 25, 2011

Too Much Economic Hot Air?

Go figure it. Everything I hear and read about the economy -- from the wails of sharply eroding wealth to the agony of mounting job losses -- tells me it's lodged deeply in the doghouse. What's more, the most telling evidence -- be it the ongoing housing slump, the spreading credit crisis, the slowing tempo of business virtually everywhere, weak industrial production, the surging number of troubled banks (252) and sharply toned-down consumer spending -- suggests the economy is not about to get materially better anytime soon.

Yet, turn on your TV or read your local paper and we're all being peppered with repeated glimmers of hope, notably through a rising tide of questionable optimism from the media, as well as from Wall Street and Washington, that suggest the worst of the economic turmoil is history. It's as though, some skeptical economists suggest, we're being invited to give serious credibility to economic pipe dreams.

Noteworthy in this sudden outburst of economic cheer was a recent front-page article by the New York Times proclaiming that Americans were growing more optimistic about the economy. Further, surveys by Reuters and the Wall Street Journal suggest the recession will end in the second half. CNBC went one step further, emphatically telling viewers the depression is over.

Even New York City Mayor Mike Bloomberg has joined the brigade of bubbly optimists. Blithely ignoring the fact that he has called for budget cuts which could eliminate 7,000 city jobs, Bloomberg, obviously anxious to pitch hopeful and happy tidings prior to another run to keep his Mayor's job, recently declared, "I think we're near a bottom and I'm getting more optimistic every day."

Our bullish brigade, however, would also be hard pressed to sell their economic sunshine to the nation's 13.2 million unemployed or to the former owners of the 4.3 million abandoned American homes.

Allen Wooster, an adviser to investment banks and international trading companies and a partner in the law firm of Wooster & Wooster in Garden City, N.Y., ridicules the increasingly bullish economic assessment. "I would like to meet anyone who thinks we're close to a bottom of our economic troubles because I have a bridge I would like to sell them that runs between Manhattan and Brooklyn," he says.

His view: We're maybe a third of the way through our economic problems, and getting the banks to lend again will be a monumental task. Wooster expects to make money from this messy situation, noting that he has bet $20 that Treasury Secretary Timothy Geithner will be out of a job within six months.

For some thoughts on our economic dilemma, here's the latest thinking of a trio of sharp economists whose modus operandi is to deal with fact, not hope.

First, let's zero in on several temporary positive economic developments that recently gave consumer spending a shot in the arm, buoyed economic optimism and helped spur a sizzling 24.5% March rally in the S&P 500. In brief, as spelled out by Madeline Schnapp, an economic adviser to West Coast liquidity tracker TrimTabs Investment Research, they are:

--A big rise in income tax refunds this year, about $28 billion, nearly 20% ahead of last year. Consumers usually spend these refund checks, which will cease in a month or two.

--A mini-boom in mortgage refinancing. About $45 billion came out of home equity refinancing in the first quarter.

The $2 trillion question, as Schnapp sees it, is whether this $75 billion of stimulus will hold since that's what drove the recent increase in durable goods and vehicle sales and goosed new and existing home sales, in turn pumping up the stock market.

The answer, of course, is nobody knows. But judging from Schnapp's ominous outlook on the most agonizing and distressing issue confronting America today, skyrocketing unemployment -- which produced $111 billion of lost income in the first quarter -- the answer would seem to be a screaming no since such losses seem destined to run even higher.

As of now, the 13.2 million Americans out of work represent a jobless rate of 8.5%. The consensus on Wall Street is that this rate will rise to 10% by next January or February. Schnapp, on the other hand, sees it happening a lot sooner, say by July or August, which, she notes, would boost the number of unemployed Americans to 15.9 million, a speedy jump of more than 20%.

Accordingly, she expects the economy -- which is contracting at a rapid clip in all segments of business, save for health care -- to continue its slide into this year's third quarter. Adding to the economic woes, she points out, Corporate America is reducing its inventories.

TrimTabs' CEO Charles Biderman observes that just about everyone thinks the economy and the stock market have hit bottom. He vehemently disagrees, contending the economy is in "awful shape. " He also rates the recent market rally as highly suspect, noting that stock purchases by Wall Street's "smart money" -- Corporate America and company insiders -- is extremely low. In contrast, the Street's so-called "dumb money" -- individual investors -- has become more bullish, snapping up $13.8 billion worth of U.S. stock mutual funds in the past two weeks. The reaction from Biderman, who is bearish on equities: "Eventually, reality is going to catch up with fantasy."

Many financial experts, among them Federal Reserve chief Ben Bernanke, are predicting a perkier second half, but the University of Maryland's well-regarded professor of economics, Peter Morici, dismisses such thinking. He sees the economy -- which he notes is shifting to permanently lower levels of production and unemployment -- moving from a recession into a depression, in other words, contracting further through most of 2009. He also argues that if you factor in discouraged workers and part-time employees who can not obtain full-time work, the true unemployment number now is closer to 17%.

Using the government's 8.5% figure for comparison purposes, Morici looks for unemployment to shoot past 10% once the stimulus effects wear off. And even if the economy grows for a time, thanks to stimulus spending, he expects it will fall back into a recession, perhaps sooner than later.

As far as the stimulus package goes, Morici contends that unfortunately, it's poorly structured and will prove too expensive for the 2-2.5 million jobs it will create for two years and which will then disappear. As he sees it, the banking and trade policies that President Obama is pursuing will drive the U.S. economy deeper into debt to Middle East oil exporters, China and other foreign creditors, throw the economy deeper into a recession and destroy as many as 10 million jobs before the calamity has completely run its course by the middle of the next decade.

JC Spender, the professor of economics at the Open University Business School in Milton Keynes, a city on the outskirts of London, views the U.S. economy as wobbly, searching for a firm footing and with no sense of a bottom. The problem, he says, is no one believes the system is sound. Relating specifically to banking, he laments that the U.S. is dependent on a system in the private sector that is still open to abuse.

Spender is convinced a depressionary environment lies ahead, with no possibility of emerging from it anytime soon unless the banking system is recapitalized, which he believes may require nationalization.

Against this background, expectations are widespread that current quarter GDP will be abysmal, plummeting 5% or more -- which is hardly a legitimate pitch for higher stock prices.

I'm no economist, but the spreading talk that the financial crisis is on its last leg seems decidedly unjustified because it's woefully devoid of supporting evidence. Hope and mirrors won't do it. To walk properly, you need the use of both legs. If one is broken, it just doesn't work, or maybe like the economy, you'll wind up limping.