Caterpillar earned $404 million in the third quarter, or 64 cents a share. Analysts had expected only 5 cents. Caterpillar’s stock is up 165 percent since March. How did Caterpillar do it? Not by selling more bulldozers. It did it by cutting more than 37,000 jobs.

The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours.

The Fed, meanwhile, has become an enabler to all this, making it as cheap as possible for companies to ax their employees. Money costs so little these days it’s easy to substitute capital for labor. It’s also easy to buy up foreign assets with cheap American money. And it’s now blissfully easy for Wall Street to borrow money almost free and buy all sorts of interests in foreign assets, especially commodities. That's why we're seeing the prices of foreign commodities and other assets go through the roof.

At the same time, the Treasury continues to be fixated on keeping banks afloat. The administration's mortgage mitigation efforts are lagging. Small businesses are starved of credit. The White House has announced a "jobs summit," which is better than nothing but not nearly as good as pushing immediately for a larger stimulus, a new jobs tax credit, and a WPA-style jobs program.

The Fed and the Teasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. This isn't sustainable.

No economy can recover without consumers. Yet American consumers, who constitute 70 percent of the U.S. economy, are facing mounting job losses as well as pay cuts. They’re in no mood to buy and won’t be for some time.

Where is this heading? No place good. Without a major shift in policy -- both at the Fed and in the White House -- the economics point to a big stock-market correction and a double dip. The politics point to substantial losses for Democrats next year.

After pointing out that the economy is shedding jobs at a slower and slower rate and that first time claims for unemployment benefits are falling, he focuses on the the astonishing 9.5 percent productivity growth registered in the third quarter -- which translates as fewer workers working harder -- and theorizes that such a trend cannot be sustained.

If you look at economies over many centuries, you can't grow productivity for 7 or 9 percent for more than two or three quarters," said Lakshman Achuthan, managing director at New York-based Economic Cycle Research Institute, whose leading employment indicators are looking up. "At a certain point, people will start to collapse at work." Should the economy expand in the fourth quarter at the same 3.5 percent annual rate it did in the third quarter -- as it shows every sign of doing -- companies won't have any choice but to hire, says Michael Darda, chief economist at MKM Partners. "There's an outside chance we could see job growth by the end of the year."

Seems like a slender thread on which to hang one's optimism, and sure enough, Nouriel "Dr. Doom" Roubini presents a rather forcefully stated dissenting view in "The Worst is Yet to Come: Unemployed Americans Should Hunker Down for More Job Losses."

The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession.... So we can expect that job losses will continue until the end of 2010 at the earliest....

The average length of unemployment is at an all time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer.... Based on my best judgment, it is most likely that the unemployment rate will peak close to 11 percent and will remain at a very high level for two years or more.

At first glance, Roubini's pessimism would seem more grounded than Gross' optimism, with one caveat -- productivity growth did not grow as fast in either of the last two recessions as it is now, nor did we witness the same kind of V-shaped GDP plummet and then rebound in 1991-2 or 2001-03 that we are seeing now.

So maybe this time is different. But probably not -- which leads to the critical question: What should we be doing now? Roubini argues that "There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers."

A temporary tax credit is in the works, by all indications. Help for state governments was axed by moderates in the Senate during the first stimulus go-round, and it's hard to see them loosening up as the deficit hawk clamor grows ever louder. As for labor-intensive, shovel-ready infrastructure projects -- I expect the administration's response to that request would be "show me the opportunities." It takes time to get big infrastructural projects underway -- more time than ever before, most likely, given various current regulatory and bureaucratic hurdles. The most obvious problem facing the Obama administration, if it wanted to start putting people on the public payroll directly, is what should the people be hired to do?

A good wrap-up in the Washington Post by Alec MacGillis cites Jared Bernstein, a White House economic adviser, as arguing "that there weren't enough public works projects ready to be launched." But MacGillis also mentions a proposal by the Economic Policy Institute (which, ironically, is the think-tank at which Bernstein previously resided") for "giving money to states and cities to hire people to paint schools, board up vacant homes, staff child-care centers and reopen library branches."

Changing diapers might not sound as dramatic as building bridges or new highways -- but not every paying job requires a shovel. A New Deal for child care might not be glamorous, but both the out-of-work and the working parents would stand to benefit tremendously

The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5 percent."

White House Chief of Staff Rahm Emanuel is reportedly on the warpath seeking spending cuts, and the administration may even be planning to apply unspent TARP money directly to paying down the deficit.

What a difference an off-year election makes! For months, we've heard a consistent refrain from Obama's economic brain trust: Under no circumstances should we repeat the mistake made in 1937 by Franklin Roosevelt, who, feeling political pressure to balance the budget, cut spending and short-circuited a nascent recovery from the Great Depression. The downside risks to the economy are still too great, warned the advisors. If we throttle back on stimulative fiscal policy, we could easily precipitate a double-dip recession. What's more, the Treasury has had little problem auctioning off unprecedented amounts of debt, suggesting that bond market investors just aren't very concerned about the deficit right now.

But hardly a week after Democratic gubernatorial losses in New Jersey and Virginia, along with some troubling poll numbers indicating GOP attacks on big-spending government are beginning to stick with voters, the administration is suddenly considering across-the-board 5 percent budget cuts.

But guess what? The downside risks to the economy are still great. Unemployment is still rising. The full impact of the implosion of the commercial real estate sector has yet to be felt. Much of what is encouraging in the third-quarter GDP growth statistics can be directly attributed to stimulus spending and such one-trick-ponies as the Cash-for-Clunkers program and a huge first-time home-buyer tax credit. Oil prices are rising. State budgets are cracking under the pressure all across the country. Banks aren't lending. Wal-Mart is apprehensive about holiday sales.

It isn't as if the White House doesn't know any of this. Just last Friday, President Obama, prodded by 10.2 percent unemployment, signed into law deficit increasing extensions of the home-buyer tax credit and unemployment benefits.

The Journal:

The administration is constrained in tackling the mounting deficit, since raising taxes or slashing spending could stunt economic growth. Administration officials say the Obama economic team is especially concerned that rapid deficit reduction could hurt the economy.

But a 5 percent across-the-board spending cut, by definition, would be an anti-stimulative measure. Even a spending freeze runs the risk of backfiring. Astonishing as it may seem, the Republican Party, thrashed in two consecutive major national elections and miles away from a majority in either the House or the Senate, is still running the country.

The most optimistic interpretation of the new emphasis on deficit reduction is that it is all just rhetoric. By the time the next fiscal year starts, in October 2010, the political implications of Obama's economic management will be a done deal, at least as far as the midterm elections are concerned. Democratic fortunes will hinge on whether the economy is experiencing a sustained recovery, and not on what the budget projections for the 2011 fiscal year. If unemployment has started to decline appreciably a year from now, it's possible that turning government attention to deficit reduction could be feasible. By talking about it now, the administration is merely trying to limit the political fallout from the GOP tax-and-spend drumbeat.

So maybe Obama gets lucky, and the economy recovers strongly enough to give the administration more options. Rising tax revenue spurred by a growing economy would automatically qualify as "debt reduction." But it's a gamble. If unemployment keeps rising throughout 2010, and the economy loses its current momentum and slides back into recession, then it really doesn't matter what the Obama administration is promising to do today about spending priorities a year from now. Because 12, 13 or 14 percent unemployment will demand extreme government attention, balanced budget or no balanced budget. And if the GOP comes back into power in Congress on the back of a bad economy in 2010, and then attempts to cut government spending all by its lonesome, its hold on power after 2012 might turn out to be just as fragile as the current Democratic majority's seems to be.

The politics of then and now are quite different, of course. Roosevelt faced nothing remotely like the intransigence currently being demonstrated by the opposition party. But could there be other constraints? While defending Obama from critics who are directly blaming the president for the current unemployment numbers, Megan McArdle makes an interesting point:

Stimulus is at best an incredibly blunt instrument. And it is made blunter by all of the procedural checks we've accumulated over decades of government growth, not to mention very powerful public sector unions. FDR could tell his government to go out and hire people to paint hallways or build dams. The current president needs Environmental Impact Statements, public review periods, and the okay of AFSCME.

McArdle is onto something. Consider the city of Berkeley, which is dotted with amazing relics of the New Deal, for instance, the lovely Codornices Rose Garden, an amphitheater of roses carved into the Berkeley hills by WPA workers. If a similar project was conceived today, it is impossible to imagine its progress occurring at anything even approaching a snail's pace. In addition to a no doubt hotly-contested Environmental Impact Statement, there would be massive NIMBY-ism from the local hill-dwellers, protests against the displacement of indigenous plants and animals from a motley crew of activists, and endless City Council meetings debating the merits of every aspect of the new project until the wee hours. Just getting new bike lanes in San Francisco has required a titanic -- and highly litigated -- struggle over the last half-decade. To pull off something on the scale of the WPA, which hired millions of workers to build thousands of schools and bridges and parks all over the country, would require battling "procedural checks" of gargantuan proportions.

Which is not to say that we should do away with impact statements or public review or protest. Making it difficult to remake the landscape has its drawbacks, but also serves to protect our landscape from being remade willy-nilly by the best connected developer or empire-building corporation. In China, the government can get things done fast, but in China, the farmer on the outskirts of Shanghai doesn't have much power to do anything but accede to the authorities when Disney and the Party decide to build a new theme park. Over the centuries in the U.S. a baffling encrustration of contraints has limited the power of the government and the private sector to accomplish their will... but not necessarily for ill.

Obama is not Roosevelt in part because, well, he's not Roosevelt, but also because the times (in addition to the Senate) will not let him be Roosevelt.

I don't want to sugarcoat anything. Calculated Risk and The Big Picture have oodles of "butt ugly" charts and graphs that make it abundantly clear that the current labor picture is as bad as anything Americans have seen since the Great Depression. I myself was moaning about the lack of jobs as recently as last Thursday. It's miserable out there.

But as readers were quick to remind me last week, unemployment is a lagging indicator. We have known all year that the unemployment rate would likely rise steadily throughout the year. Let's remind ourselves again that the rate at which the economy is shedding jobs is slowing. That's a good thing. The point at which it would be time to cry out in despair that the world is ending would be if the rate of job loss started growing again -- a sign of the dreaded double dip recession.

Paul Krugman is repeating his usual refrain: Obama should have pushed for a bigger stimulus at the beginning. Perhaps, in the most Rooseveltian of all possible worlds, he could have come into office and immediately orchestrated a massive WPA-like jobs program. But even if one accepts the rather unlikely possibility that Obama could have pushed through a budget deficit even larger than the $1.4 trillion we are currently looking at, I think there's good reason to believe that it would have been very difficult to materially alter the shape of the unemployment curve in the first nine months of the presidency. Remember, Obama came into office at the absolute height of the crisis -- the shock to the economy that hit a year ago had barely begun to work its way through its system.

There are definitely some bad future scenarios lying in wait. One possibility is that high unemployment next year leads to a Republican takeover of the House, and complete government paralysis ensues. Then we might find out for sure what happens when the government does not stimulate an economy as sick as ours. That is an experiment I am not looking forward to. But for the moment, we do have a White House committed to fiscal stimulus, even if it is operating under budgetary constraints -- not of its own making -- that severely reduce its freedom of action.

The numbers are bad, sure. But they could be worse, and they might get better. For the sake of all our animal spirits, let's not despair.