Good Growth in 2010; 2011, 2012 Below Potential - Edward Deak

by: Harlan Levy

Edward Deak is a Fairfield University economics professor, formerly head of the department. He is also the Connecticut model manager for the New England Economic Partnership, which produces a semi-annual New England forecast.

H.L.: Is the U.S. economy ready to grow, or are there too many negatives?

E.D.: The U.S. economy is going to show reasonably good growth for 2010.

That growth is going to be evident with the March job numbers. The February job numbers were depressed because of weather conditions, and you’re going to be adding upward of 1 million census workers on government payrolls for March through September. It’s going to ramp up in March and April, and that will provide a good boost to the economy even though it’s temporary. Those people will have wage income, and you would expect they would spend a good portion of that income helping to boost spending in the first half of 2010.

In addition, a lot of the tangible expenditures on infrastructure and other federal programs from the stimulus package passed a year ago will be hitting the economy in the period March to September as well. We’re talking hundreds of billions of dollars.

I think 2010 is going to give us real economic growth of 3 percent, plus or minus.

H.L.: But what about job losses? The numbers aren’t lessening, dramatically.

E.D.: Job gains will start in March, but the problem is that the unemployment rate will not decline much if at all and may actually rise as the economy begins to show some recovery steam. That’s because there are a lot of people no longer part of the work force who will be drawn back in as job opportunities become more plentiful. So there will be more unemployed workers looking for jobs.

H.L.: When do you think job gains will return to pre-recession levels?

E.D.: Not for many years. First, we’ve lost almost 8 ½ million jobs. Every month the U.S. economy adds about 100,000 new people looking for work, so you have to add at least 100,000 new jobs just to stay even. If we were able to add 250,000 workers a month it would take almost three years to gain back the jobs we’ve lost. Just the math alone is overwhelming.

Add to that the fact that many of the unemployed have been out of work for a year or more, and it’s unlikely that the older workers in their 50s-plus are going to be able to find jobs at pay levels comparable to what they had previously.

H.L.: Will the job losses condemn the U.S. economy to stagnancy?

E.D.: That’s the big question. If you start looking beyond 2010 when the Federal

Reserve starts raising interest rates — because it can’t keep rates incredibly low in perpetuity — and when the federal government realizes it can’t continue to run trillion-dollar annual deficits and it either raises taxes or cuts spending or both, the question is do you get a self-sustaining expansion in 2011, 2012, and 2013? Or do you get rising inflationary pressures and further fiscal drag from state and local budget deficits? That’s the question.

If people are going back to work, workers are spending, businesses are engaging in capital spending, the U.S. is exporting products because other parts of the world are doing better and buying goods, especially Asia, and if the housing situation calms down, housing prices start to rise, and banks feel comfortable in making small business loans, then you get a self-sustaining expansion, and the national economic outlook for 2012 and 2013 looks pretty good.

If one or more of those things don’t materialize, the strength of the recovery diminishes. My guess is you’re going to see a period of slow growth in 2011, 2012, and 2013, and a lot of people out of work, particularly older workers, who will drop out and start taking Social Security and money from their 401(k)s, and they’ll be lost to the work force.

H.L.: What’s your take on the housing market and its effect on the economy?

E.D.: The housing market is still unstable. It’s affecting the economy by cutting new construction, and foreclosures are still rising. Although prices have risen a bit over the last few months, the peak period of foreclosures is still ahead of us, and that’s likely to depress housing prices a bit more.

After the Federal Reserve stops buying mortgage assets at the end of this month, interest rates will rise a bit, and after the federal assistance to home buyers ends at the end of April, the housing market is going to be on its own and unlikely to show major strength before year’s end.

H.L.: So are we in for more recession?

E.D.: I’m optimistic that we will not drop into a double-dip recession, and I’m actually strongly optimistic that 2010 will be a much better year than 2008 or 2009. Check with Jack Kervorkian in 2011 and 2012. But seriously, when you get to those years it will look like progress below our potential.

H.L.: First-quarter earnings reports will be out in April. What’s your prediction?

E.D.: They’ll be all right. Business earnings up to now have mostly been supported by cost cuts. As you go into 2010 with more demand you’re going to get top-line earnings from sales growth, so that will help a lot of firms. 2010 will be a good year.

H.L.: How are the states doing?

E.D.: This is going to be a brutal, brutal budget season for local governments. There’s going to be enormous taxpayer pressure to hold the line on spending and to cut spending, and that’s going to put substantial pressure on the public workforce to shrink, especially teachers and uniformed services: police, fire, and sanitation. That is going to be very painful, town by town.

Disclosure: No positions