Technically the great recession ended a year ago and real economic growth, as measured by the gross domestic product (GDP), has recovered strongly from its mid 2009 trough. And yet the economy feels so fragile again and at risk of a U-turn into double-dip territory. In response the stock market has been on a roller coaster ride all quarter.

Early in the quarter Greece’s debt and solvency problems spread fear across the globe. Before investors could conclude that they were overreacting to Greece’s real affect on global credit markets, the Deepwater Horizon oilrig exploded, killing 11 workers, and dumping millions of gallons of oil into the Gulf of Mexico. On May 6 stocks experienced and then rebounded from the largest ever intra-day decline. Finally, by the end of June, Congressional negotiators agreed on terms for a notable, yet controversial, financial reform bill. The bill will likely get passed in the middle of July.

Save for the momentary gasp as stock trading went awry in May for a day, the drying up of new home sales after the end of the government tax incentive for first time home buyers, and the very slow recovery in job growth, the catastrophe in the Gulf may be the biggest psychological reason investors feel uncertain and vulnerable.

It is premature to put numbers to the spill’s impact on the economy but the costs will surely exceed the $80 billion threshold set by hurricane Katrina. The impact on the Gulf’s tourism, real estate, seafood, and oil and gas industries is wrenching and the ecological impact is tragic. We should expect to see higher seafood prices and possibly higher gasoline prices. The higher seafood prices will be mitigated by a shifting of resources from other domestic regions and offshore; we import about 80 percent of our seafood and the Gulf supplies only about 2 percent of our seafood consumption. As far as gasoline prices are concerned, we import more than 65 percent of our oil (have we forgotten that the whole point of our push into deep water exploration has been to alleviate our dependency on foreign nations?) and our stronger dollar will keep oil prices in check for now.

Though the domestic economy will likely not feel a large ripple effect, the thousands of jobs lost in the Gulf region, while balanced somewhat by new oil clean-up jobs, may impact consumption behavior and ultimately a full recovery.

The many potholes this quarter have been jolting and recent unemployment and housing reports were disappointing, which reinforces the fact that we are experiencing a jobless and fragile recovery. It leaves many to wonder if our nascent recovery is in trouble.

It is impossible to know whether positive or negative forces will prevail. But the great debate is on amongst economists and financial reporters. For a double-dip to technically occur, GDP would have to turn negative again. Overall, economists are predicting that the economy for all of 2010 will slow to 3 percent growth. That is a significant decline from the 5.6 percent growth we had in the 4th quarter of 2009, but growth is growth.

Financial Reform Bill
If the economy is indeed slowing down, at least the new financial reform bill can’t be accused of being a contributing cause. It may not go far enough to prevent future problems but at least it doesn’t tamper too much with bank and financial service operations. Though I sit firmly in the camp of “less is more” when it comes to government regulation, preferring to let the marketplace reward or punish corporate behavior, I believe that governments need to step in and affect reasonable changes when the system is obviously outdated.

It is not a perfect bill but no one could expect a bill that would make everyone happy. Big banks will see modest disruption to their normal operations. The three major changes for banks are that they will have to raise their equity capital over time, move some of their riskiest derivatives to separate entities, and pay for a portion of the costs of the reform package (which is estimated at $19 billion over the next ten years). The details of how the banks will pay are still being worked out, but it may be a combination of increased FDIC insurance premiums and a new tax payable to regulators over ten years. The latest deal has TARP ending three months early to save money and limit this bank tax. The tax may ultimately saddle borrowers with higher interest costs, but talk of it hindering economic recovery is exaggerated. To those who are angry at the notion of taxing banks at all, I say that the banks should consider it a fair trade for being able to keep their business models pretty much intact.

I can’t imagine there are too many investors out there who actually believe that this bill will prevent future financial crises, but it’s a good start. It makes a reasonable attempt to bring our financial system up to date with derivative securities by forcing standard contracts onto exchanges and customized contracts into reporting repositories. The bill creates an oversight council, led by the Federal Reserve, to proactively prevent another industry meltdown. That sounds good in theory but forcing banks to become smaller would have been a better solution.

The best part of the bill is that it provides for a consumer protection agency focused on ending predatory lending and making sure borrowers can afford their loans. If it accomplishes just this it will be a big success.

Have a happy July 4 everyone.