U.S. investor appetite returning

The index is composed of 289 stocks from the S&P 500, and has increased approximately 13% this year, surpassing the broader market.

Jack Ablin of Harris Private Bank told FT, “Growth is more expensive than value, so this shows investors are willing to pay up for certainty. As long as momentum remains, we favour the style basis of growth over value.”

Read: Investor confidence improves

But, while U.S. investor sentiment seems to have improved, the economy is falling far behind.

Read: Canadians predict recession for the U.S.

Many economists say the agonizing recovery from the latest Great Recession—which began in December 2007 and ended in June 2009—is the predictable consequence of a housing bust and a grave financial crisis.

And it’s been followed by the feeblest economic recovery since the Great Depression, writes Paul Wiseman for Associated Press.

“Since World War II, 10 U.S. recessions have been followed by a recovery that lasted at least three years. This particular recovery, though, is the weakest by just about any measure.”

In his view, the ugliness goes well beyond unemployment, which at 8.3% is the highest recorded level this long after a recession ended.

Credit, which powers economies, evaporated after Lehman Brothers collapsed in September 2008. And a 30% drop in housing prices erased trillions in home equity, bringing construction to a near-standstill.

So, any recovery was destined to be a slog. Read: Advisors optimistic about U.S.

“A housing collapse is very different from a stock market bubble and crash,” says Nobel Prize-winning economist Peter Diamond of the Massachusetts Institute of Technology. “It affects so many more people and corrects very slowly.”

The U.S. economy also faces consumer and business confidence troubles, with the deeply divided U.S. political system delivering further growth uncertainty.

An impasse between Obama and congressional Republicans brought the U.S. to the brink of default on the federal debt last year. This confrontation rattled financial markets and sapped consumer and business confidence.

Given the political divide, businesses and consumers don’t know what’s going to happen to taxes, government spending or regulation. Sharp tax increases and spending cuts are scheduled to kick in at year’s end, unless Congress and the White House reach a budget deal.

What’s more, it struggles with debt larger than the size of its 2011 economy, with the debt ceiling currently set at approximately $16 trillion. As one recent infographic physically shows, the country’s national debt is enormous, and will soon account for 20% of the entire world’s combined economy.

Associated Press compared nine economic recoveries since the end of World War II. Read on to see how the U.S.’s current comeback stacks up against past recoveries.

Feeble growth

The engines that usually drive recoveries aren’t firing this time around.

Read: U.S. growth slows to 1.5%

Investment in housing, which grew an average of nearly 34% this far into previous postwar recoveries, is up just 8% since the April-June quarter of 2009.

The overbuilding of the mid-2000s left a glut of houses. Prices fell and remain depressed, and the housing market has yet to return to anything close to full health even as mortgage rates have plunged to record lows.

Government spending and investment at the federal, state and local levels was 4.5% lower in the second quarter than three years earlier.

Three years into previous postwar recoveries, government spending rose an average 12.5%. In the first three years after the 1981-82 recession—during President Ronald Reagan’s first term—the economy got a jolt from a 15% increase in government spending and investment.

This time, state and local governments have been slashing spending and jobs. And since passing President Barack Obama’s $862 billion stimulus package in 2009, a divided Congress has been reluctant to try to help the economy with federal spending programs. Trying to contain the $11.1 trillion federal debt has been a higher priority.

Since June 2009, governments at all levels have slashed 642,000 jobs, marking the only occasion government employment has fallen in the three years after a recession. This long after the 1973-74 recession, for instance, governments added more than 1 million jobs.

Exhausted consumers

Consumer spending has grown just 6.5% since the recession ended. By contrast, spending rose an average of nearly 14% in the first three years after the other nine recoveries.

Many consumers have lost access to credit, which fueled spending in the 2000s. falling home prices have slashed home equity by 49%, from $13.2 trillion in 2005 to $6.7 trillion early this year.

Read: U.S. banks ease credit conditions

Others are spending less because they’re paying down debt or saving more. Household debt peaked at 126% of after-tax income in mid-2007 and has fallen to 107%, according to Haver Analytics.

The savings rate has risen from 1.1% of after-tax income in 2005 to 4.4% in June. Consumers have cut credit card debt by 14% since it hit levels of over $1 trillion in December 2007.

“We borrowed too much,” says Carl Weinberg, chief economist at High Frequency Economics. “And are now in a slow, deleveraging period.”

No jobs

The U.S. economy shed a staggering 8.8 million jobs during and shortly after the recession.

Since employment hit bottom, only 4 million have been replaced. This is by far the worst performance since World War II. In the previous eight recoveries, the U.S. economy had regained more than 350% of the jobs lost on average.

Never before have so many Americans been unemployed for so long three years into a recovery. Nearly 5.2 million have been out of work for six months or more. The long-term unemployed account for 41% of the jobless; the highest mark in the other recoveries was 22%.

Read: Weak job numbers released

Federal Reserve Chairman Ben Bernanke has called long-term unemployment a national crisis. People’s skills are eroding, and they’re losing contact with former colleagues who could assist them.

Shrinking paycheques

Usually, workers’ pay rises as the economy picks up momentum. Not this time.

Pay raises haven’t kept up with even modest levels of inflation, and earnings for production and nonsupervisory workers—a category covering about 80% of the private, nonfarm workforce—has risen just over 6.2% since June 2009.

Consumer prices have risen nearly 7.2%. Adjusted for inflation, wages have fallen 0.8%. In the previous five recoveries with available data, real wages had gone up an average 1.5% at this point.

The good news? Falling wages haven’t hurt everyone.

Lower labour costs helped push corporate profits to a record 10.6% of U.S. GDP in the first three months of 2012, says the Federal Reserve Bank of St. Louis. And those surging profits helped lift the Dow Jones industrials 54% from the end of June 2009 to the end of last month. Only after the recessions of 1948-49 and 1953-54 did stocks rise more.

Stock investments may be coming back as well, but savings are still getting squeezed by the rock-bottom interest rates the Fed has engineered to boost the economy. The money Americans earn from interest payments fell from nearly $1.4 trillion in 2008 to barely $1 trillion last year.

The silver lining

This fragile recovery is nothing like the uphill climb experienced after the Great Depression, which included two severe recessions separated by a four-year recovery between March 1933 and May 1937.

Calculations by economist Robert Coen, professor emeritus at Northwestern University, suggest things were far bleaker during this particular recovery, with unemployment remained well above 10%—and usually above 15%—throughout the decade.

Only the outbreak of World War II restored the economy and the job market to full health.