Outside editorial: Way too soon to break open the champagne

The recent smattering of good economic news - the stock market is up more than 25 percent from its low point in March, housing starts have increased and consumer confidence is finally on the rise - has left some observers turning to the next phase of recovery. As reassuring as it is to have a few up arrows, there is a long way to go before anything resembling a sustainable recovery can be proclaimed. Far-reaching governmental action on the fiscal, monetary and financial sector fronts has been critical in putting a floor on this downturn. But a dramatic and steady "V-shaped" recovery can hardly be counted upon, given the many economic challenges remaining. The U.S. economy contracted 6.1 percent during the first quarter of the year. The International Monetary Fund projects that the global economy will contract by 1.3 percent this year and remain sluggish in 2010, and it predicts a total of $4 trillion in credit write-downs over the next two years. The message is depressingly clear: The world is not yet out of the woods.

One of the lessons of past recessions is that a premature attempt to return to business as usual can abort a fledgling recovery. Talk of a second stimulus package has subsided, but Washington may have to spend more to prop up the economy. Other countries, particularly those with more room to borrow, will have to step up as well. The Federal Reserve faces the challenge of using its many tools to bring down interest rates while preparing an exit strategy for when the risk of inflation starts to outweigh the risk of deflation. Even if officials do everything right, unemployment, currently at 8.5 percent, is likely to move into double-digit territory before heading down.

And then there is the central question that has yet to be addressed: What will be the driver of growth? For decades, the world has depended on the U.S. consumer to gobble up goods, helping to fuel global growth. But U.S. household wealth has fallen $13 trillion, or 20 percent; it is unlikely that consumers could return to prior levels of spending even if they learned nothing from this crisis. Over time the United States will have to increase its investment rate and exports, while countries that have been saving too much, particularly China, will have to find ways to increase domestic demand. So far old patterns persist, with the United States leading the way in borrowing its way out of this recession. Borrowing and saving nations have yet to come close to an understanding of how this imbalanced relationship will change.

Over time, again, the United States and other high-borrowing countries will have to set in place fiscal plans to get their debt levels under control while being careful not to implement the contractive policies before the recovery is stable. Necessary spending reductions and tax increases should be staggered and phased in gradually so as not to be destabilizing. Timing, and a new global grand bargain, will be key in securing a lasting recovery. Let's hope the good news keeps coming, but let's not underestimate the challenges ahead.