A Jobless Recovery?

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SOHN: Corporate profits come from two sources: volume and margins. The volume is going up not that rapidly, so it must be margins. Why are margins going up? Are they raising prices? No. Cutting wages? No. It is coming once again from the productivity gains. If you look at the unit labor cost, meaning the cost to produce each dollar of sales, it fell in the third quarter, fell in the fourth quarter and then again in the first quarter into the second quarter. I think that is another reason margins are rising, supporting corporate profits.

SWONK: It started with Michael Milken and Henry Kravis, the hostile takeovers. You could actually fire a ceo. It started in the '80s, culminated in the '90s and was a massive trigger point to adopting new technologies more rapidly, and cost cutting becoming a mantra. People are rewarded for cost cutting.

TIME: Given the relatively weak job numbers, why are consumers so optimistic?

GOLDSTEIN: You would think that a public scared by that rise in unemployment, that rise in layoffs in the first quarter, would be in a pretty lousy state of mind. But consumer confidence right now is at a level associated with the middle of an expansion. If you are a baseball fan, it is almost like a team in midseason form on opening day. Even though wage growth has gone down, from 4% to 3.2%, there is still wage growth, and consumers are reasonably content, and so they are still spending.

SPRIGGS: The other dimension is that growing inequality has made it possible to have what appears to be a recovery because the brunt of unemployment falls on low-income families. You can still have consumption going because those at the bottom aren't contributing much in consumption anyway.

TIME: Are low interest rates and a strong housing market feeding into some of that spending?

SOHN: Consumers consider stock-market gains to be more transitory than housing gains. When housing values go up, you tend to spend more.

SWONK: It erases the argument that we save in our homes. We don't do that anymore. Last year people who refinanced their mortgages took out about $140 billion in cash, in the form of lower payments and cashing out some of their home equity.

TIME: Are housing prices going up so fast that they're in a speculative bubble?

GOLDSTEIN: No, there is no bubble.

BEHRAVESH: Housing is part of the answer. What the Fed succeeded in doing this cycle was turning housing from a destabilizing force in the economy to a stabilizing force. Housing won't boom the way it has been. We won't get 8%, 9% annual increases in the average price of a house, but it won't collapse. It will go down to a 2%, 3% increase. I don't think it will fall off the face of a cliff.

SOHN: Americans took out about $70 billion to $80 billion of their home equity. Did they blow it? I don't think so. The surveys show that the money went first to home remodeling, then to debt consolidation, investments in stocks and bonds, and consumption like buying a car or taking a vacation. It was used responsibly, boosting economic growth.

TIME: Why isn't the stock market responding to signs of a recovery?

SOHN: There is a crisis of confidence in the stock market. It is wider and deeper and more basic than it used to be. People are saying, "I knew the stock market was a gamble, but I thought it was an honest casino. I am mad and angry, and I am going out and buying a car or house instead of being in the stock market."

BEHRAVESH: Right now, two things are weighing down the market. One, the market got way ahead of itself in terms of the strength of recovery and is now coming to Earth. The second is Enronitis. As for fears of a dirty bomb or other attacks, they play into it day to day or week to week, but I don't think that is really what is pulling the market down.