Dow Slumps 159: "We Need Substantially Higher Growth Rates," Galbraith Says

America's economy rose 3.2 percent in the first quarter, more evidence the recession is easing. Among the highlights, consumer spending was the strongest since the beginning of 2007. President Obama today called the numbers an "important milepost on our road to recovery," ABC News reported.

"We're coming up off the bottom a little bit," says our guest James Galbraith, economist and Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the University of Texas.

But given the extent of the decline, 3.2% growth at this stage of the recovery is a "good thing, but it's not a great thing," Galbraith tells Aaron and Henry in the accompanying segment. 

Indeed, the report was weaker than economists had forecast and, along with worries about a possible criminal investigation of Goldman, weighed on stocks Friday. Completing its worst week since January, the Dow fell 159 points, or 1.4%, while the S&P shed 1.7% and the Nasdaq lost 2%.

The road to recovery

So what would it take to spark Americans to feel more confident about this nascent recovery? "We would need a sustained period of substantially stronger growth rates, which would spur optimism and job creation," Galbraith says.

Wednesday the Fed decided to keep benchmark interest rates unchanged at near zero levels, and reiterated its pledge to keep rates low for "an extended period."

Galbraith's analysis: The Fed effectively is still "in the business of bailing out the banking system."

Only when financial institutions stop using the easy money to shore up their balance sheets and start lending to businesses and consumers will America start to see a sustainable recovery, Galbraith says. "What the Fed is saying is that very clearly they do not see that they have the maneuvering room yet to actually implement the exit strategy that they've been talking about."

A jobless recovery?

Meanwhile, unemployment stands at 9.7 percent, and will likely remain "stuck at a very high level for a long time," Galbraith says. He's a proponent of aggressive government action to help recent graduates find work and make it easier for older Americans to leave the labor force.

It's unlikely the economy can create the 250K to 300K jobs a month necessary to return us to jobs levels of three years ago, Galbraith says. "There's just a huge mountain to climb and you have to figure out ways to go around it, or to smooth off the top a bit."