Everyone is anxious to know which way the economy is heading. On one hand, the U.S. GDP contracted more sharply than expected in the first quarter, but much of the U.S. government's stimulus spending has yet to kick in. The U.S. economy shed 563,000 jobs in April while unemployment rose to 8.9%, and economists -- including Federal Reserve Chairman Ben Bernanke -- expect job losses to continue in coming months.

But there's also reason to believe the economy may be bottoming out. In Bernanke's testimony to Congress on May 5, he noted that consumer spending, which dropped in the fourth quarter of 2008, is up in recent months; sales of new and existing homes also appear to be stabilizing. Gallup's economic indexes show a modest uptick in consumer mood, although consumers are still keeping a tight hold on their wallets. (See "Weekly Economic Wrap: Hiring Up, Spending Still Down" in the "See Also" area on this page.)

We're in the midst of a nerve-wracking period of conflicting information with seemingly endless potentialities and variables. Following any direction without careful thought offers sharp consequences to business leaders and managers. Right now, many executives' most pressing questions are: Has the economy reached an inflection point and begun moving in a positive direction? And if not now, when will it?

Perhaps more importantly, the most forward-looking among us really want to know what will happen a year or two after that tipping point has been reached. Will the recession have been so painful that U.S. consumers will have changed their profligate ways? Or are they just waiting for things to stabilize before they start throwing money around again?

Gallup Chief Economist Dennis Jacobe, Ph.D., has many insights into where the economy is going -- and why. Dr. Jacobe was one of the earliest forecasters of the downturn: In June 2007, he warned us what could befall the economy if the housing market didn't right itself, and in February 2008, he noted that the U.S. economy was slipping into recession -- a reality that official recession watchers at the National Bureau of Economic Research later confirmed, stating the U.S. recession began in December 2007. (See "The Subprime Meltdown Will Burn Everyone" and "Is the U.S. in a Recession?" in the "See Also" area on this page.)

Dr. Jacobe is not much more cheerful about the economy now, but he's sure of a few things. Among them, as he notes in this interview, is that job creation is not a trailing indicator as is commonly thought, and the economy won't improve as long as a significant percentage of the working population is unemployed. What's more, the financial system has been devastated by this recession, and this will force consumers to be more prudent and rational whether they want to be or not. That, says Dr. Jacobe, is no fun. But once that adjustment is made, our economy will begin growing once again.

GMJ: In the first quarter of 2009, GDP was down 6.1 percent, a sharper decline than had been expected.

Dr. Jacobe: Yes. There was more inventory decline than many anticipated. The economy was weaker in the first quarter, businesses were liquidating their inventories faster than people had anticipated, and government stimulus spending hadn't kicked in yet. That 6.1 percent is also a preliminary number, so it can be revised. When the economy is contracting anywhere near 4% to 6%, though, that's a significant decline, and it has major implications for things like the job market.

The consensus among economists and Wall Street observers seems to be that the economic freefall of late 2008 and the beginning of 2009 is over, and now the rate of decline is slowing. The real issue is whether what appeared in April and May to be an approach toward leveling off will continue or whether there's another drop yet to come. We don't know yet.