'Moderately Vigorous Recovery' Coming in 2010
December 16, 2009
In 2010 the U.S. will enjoy a “moderately vigorous recovery” in which real GDP will rise by 5 percent from the fourth quarter of 2009 to the fourth quarter of 2010, said Michael Mussa, AM ’70, PhD ’74, senior fellow at the Peterson Institute for International Economics. “Once they end, deep recessions are followed by steep recoveries,” Mussa said during Business Forecast 2010 at The City Club of San Francisco on December 16.
Nonetheless, Mussa’s forecast — real GDP expanding by 10 percent over the first six quarters — is substantially below the average pace of recovery for previous deep recessions after World War II, he said. “My forecast of about 3.5 percent growth in the last two quarters of 2009 and 5 percent growth in the four quarters of 2010 comes in at about two-thirds of the average and barely half of what we experienced in the recovery of 1983-84,” Mussa said.
Of the $650 billion in growth during 2010, he said:
• Half or less will come from a rise in consumer spending, which now accounts for 70 percent of GDP.
• Government purchase of real goods will rise a “modest” $60 billion to $80 billion.
• The majority of the “oomph” driving growth will come from gross private domestic investment, which will add $300 billion to $350 billion to real GDP between the end of 2009 and the end of 2010.
• Deterioration in real net exports will be “quite modest,” as emerging Asia leads world recovery and the dollar remains strong, in contrast with previous recoveries.
In nominal terms, residential real estate prices are nearing their bottom and will remain stagnant for the next few years, said Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow. “Their real values will erode,” Hurst said. “But if you’re a lender, you might care about their nominal value because it might determine the defaults in your portfolio. That should be relatively stabilized, at least according to historical housing cycles, which are playing out well for the U.S. as a whole.”
The sluggish recovery of domestic consumption will make this overall recovery different from previous recoveries, he said. “What happens to consumers when they start releasing their cash, if at all, is going to determine whether we get one of these big robust growths or less robust growth coming out of the recession,” Hurst said.
It’s very important to consider the effects of short-run control on economic policies as Congress debates proposals to grant the Government Accountability Office authority to audit monetary policy decisions of the Federal Reserve, he said. “Short-run control over Federal Reserve policy tends to result in more inflation,” Hurst said. “If you think there is a benefit for controlling the Federal Reserve in the short run, you at least have to weigh it against those costs.”
The current recession is the most severe since World War II in terms of lost employment, but is nowhere near the conditions of the Great Depression, said John Huizinga, Walter David “Bud” Fackler Distinguished Service Professor of Economics. “If you only remember one number I presented, remember that in the Great Depression we lost 20 percent of the jobs in the U.S. economy,” Huizinga said. “Thank God we never got anywhere close to that.”
For many reasons, the current recovery may be slower than average, he said. But Huizinga remains unconvinced. “If we progress the same way as we did in all five of the recoveries from our previous recessions, before the end of 2010 employment should be back to where it was at its peak level,” he said. “Employment tends to recover pretty quickly, regardless of what kind of recession we have.”
In the United States and around the world, central banks must eventually shrink their balance sheets without igniting inflation and without triggering another recession, Huizinga said. Meanwhile, governments inevitably must cut spending or raise taxes, he said. “Either one of those are likely to force us back into another recession,” Huizinga said. “We’re safe in 2010, but much of what we’ve done is to try to make this recession shallower at the cost of setting up another recession 18 months or two years down the road.”