Faculty Predict Slow Economic Growth and High Unemployment in 2011

Published on November 30, 2010

In 2011, the U.S. economy will grow significantly more slowly than during recovery from previous recessions and unemployment will remain high, prognosticators agreed at Business Forecast 2011 on November 30. “My forecast is much like the weather today: partly cloudy with a chance of intense storms coming down the line, because we still have a lot of fragilities out there,” said Randall Kroszner, Norman R. Bobins Professor of Economics and former governor of the Federal Reserve Board.

Kroszner was one of three Booth faculty who shared economic predictions at the event, which drew a crowd of about 1,000 alumni, students, and members of the business community to the Sheraton Chicago Hotel and Towers for the annual forecast.

He projected “reasonable, but not extremely robust” growth of 3.4 percent in real GDP and said he is optimistic the country will weather the current storms. He is not convinced the United State will be stuck in low growth for a very long period of time because, among other reasons, real private investment rose an “astonishing” 19 percent in 2010, Krozner said.

“There has been incredibly strong investment in equipment and software,” he said. “Firms are still willing to invest, and part of the reason for that is productivity has remained quite high. The bottom line is that the basic production machinery of the economy is not broken.”

A 3 percent increase in consumption will power the recovery, but the country will see very little growth in jobs, Krozner said. Businesses are reluctant to hire permanent workers because of uncertainty about taxes, a ratio of government spending to GDP that is 2 percent higher than in the previous 50 years and is paired with declining revenue, and concerns over health care costs, he said.

During 2011 the U.S. economy will be slowed by the effect of “distorted behaviors” causing the “misallocation” of economic resources during the boom years that preceded the recent recession, said Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow. As a result, Hurst predicted:

  • Housing prices will not recover in 2011 or anytime soon. “It’s just not in the data,” he said. “You’re basically going to get many years of normal housing price growth, which is essentially zero to 1 percent in real terms. This is probably going to happen for the next decade.”
  • Recovery from this recession will continue to be less robust than after previous recessions because Americans must deleverage their overspending during the economic boom and build up assets. “This doesn’t mean we’re going to be sluggish forever; it just means we’ve got some work to do and it’s going to take a little bit of time,” he said.
  • Unemployment will remain relatively high in the short run because the housing boom created a glut of construction workers — and, in some states, of mortgage workers — who must be retrained to meet demand in new fields. “The bulk of the unemployed are construction workers, but nobody’s hiring construction workers anymore,” he said.

The “two-faced” nature of economic recovery in the U.S. and Europe is “quite worrisome,” said Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance. In states that did not suffer as much from the housing bust, employment and sales are growing, Rajan said. People with incomes of $75,000 or more are more optimistic about the economy, while unemployment for people with college degrees is half as high as for those without degrees, he said.

“These divisions across geographic and income segments cause a deterioration in political dialogue,” Rajan said. “In the U.S., the left does not want to talk to the right, which is a recipe for gridlock. In the past, government not working may not have been a bad thing. But government not working when your fiscal deficit is 10 percent of GDP is not a good idea. Much needs to be done to bring things back under control, and that requires cooperation.”

— Phil Rockrohr