Is the Economic Recovery Real?

Good news on the economic front continues to pour in. In yet another sign of improvement in the U.S. economy, the Bureau of Labor Statistics announced last week that employers added 171,000 jobs in October, and revised the number of jobs added in September from 114,000 to 148,000. It also reported that more unemployed people who had given up on finding work are now looking for a job--a sign of growing confidence in the economy.

The positive employment news comes as stocks are trading higher, consumer confidence is improving, and the housing market is beginning to stage a comeback. But despite these indicators, dark clouds loom--and some experts say the recovery may be an illusion that can't be sustained.

"Is this recovery a product of productive economic activity? Or is this something that's happening through government stimulus, either fiscal or monetary?" says Shawn Ritenour, a professor of economics at Grove City College, a university just south of Pittsburgh.

A close examination of the current state of the economy concludes that much of the good news that has come out recently paints a true and positive picture of the direction of the economy. But many of the improvements have been made possible through government intervention. Whether the economy can keep strengthening without continuous government intervention remains unclear.

"We have questions about the economy that have never been asked before," says Ron Weiner, founder and president of RDM Financial Group, a wealth management firm in Connecticut. "These are roads that have never been ventured down before."

[In Pictures: 10 Signs American Families Are Falling Behind.]

Positives with caveats. Gross domestic product in the United States grew 2 percent in the third quarter, up from 1.3 percent in the second quarter. At the depths of the recession, GDP was down nearly 4 percent.

The GDP increase is promising, as it exhibits a growing economy. However, economists say it's not growing fast enough to add the number of jobs needed to relieve those who are seeking employment.

Another concern is that government spending--not private investment--is driving GDP growth. Through a process known as quantitative easing, the Federal Reserve has injected hundreds of billions of dollars into the economy on three occasions in the past four years.

According to Grove City's Ritenour, these massive cash infusions have made the economy appear more robust than it is. "I don't think it's a good sign when the largest contribution to GDP is government spending," he says. "I would not be surprised, if the government stimulus goes away, to see quite a bit of this recovery was a stimulus bubble."

The stock market is also on a historic run. Since March 2009, stocks have been in a bull market--the ninth longest on record. Stock values have increased nearly 109 percent since then.

Unfortunately, most Americans have sat this market out. A 2011 Gallup survey found just 54 percent of Americans have investments in the stock market, the lowest percentage since 1999. In an October 2012 survey, Gallup also found that 54 percent of Americans believe it's a bad idea to invest $1,000 in the stock market.

[In Pictures: The S&P's 10 Worst Trading Days.]

Weiner says such reluctance has caused many Americans to miss out on one of the best money-making opportunities in the history of the market. "We have an entire generation that was whacked in 2000 and again in 2008," he says, referring to the implosions of the tech and housing bubbles, respectively. "There's a whole segment of the population that thinks that equities aren't the place to be."

As a result, Weiner says, "This whole segment is hunkered down and is destined not to make money."

Uncertainty moving forward. Both Ritenour and Weiner say that because so much of the good economic news is tempered by other circumstances, it's hard to tell where the market is headed and if the ongoing recovery can be sustained. "If we're dependent on fiscal stimulus and monetary stimulus, once that goes away, economic law reasserts itself," says Ritenour. "My concern is the stimulus seems to be what is needed to keep unemployment from being really bad."

Ritenour is also concerned about Americans' lack of savings. According to data released by the Commerce Department last week, Americans increased their spending in September, which would normally be a sign of confidence. Yet at the same time, they're saving less, the Commerce Department found.

[Read: The 10 Most Popular Mutual Funds of 2012.]

"That bubble really was indicative of a massive amount of capital being squandered," Ritenour says. He believes it's going to take voluntary savings to get that capital back.

But according to Weiner, the hazy economic picture should not discourage investment. "There's always the investor that really believes things always get better," he says. "Are they ignoring the facts? There are enough good facts to say that things probably won't crash."

Still, Weiner isn't completely sold on recovery. "There are a lot of people on Wall Street who are quite bullish," he says. "They may be right, but I'm not joining the bandwagon yet."



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