Thread: Why the US economy won't recover

1/11/2010 9:06 PM ET

America's vulnerable half-speed recovery

Many economists say the US economy will grow by a paltry 2% a year for the next decade. Here's why the road looks so rough.

By SmartMoney

For many economists, particularly those who belong to the American Economic Association, the new year began on a gloomy note. At the organization's annual meeting at the start of January, many economists predicted the nation's gross domestic product would grow by less than 2% a year during the upcoming decade.

Historically, that would be quite a letdown. Since World War II, most steep downturns have been followed by strong recoveries. Based on historical patterns during postwar periods, growth should be more like 6% when recovering from a deep recession like the one we've just been through, says Robert Johnson, the associate director of economic analysis at Morningstar, predicting that recovery from this recession is unlikely to follow the sharp V-shape pattern many economists were expecting.

Johnson is not alone. "I hate to say 'This time is different,' but I think it may be," says David Wyss, the chief economist for Standard & Poor's. With overhanging debt at the household and national levels and a serious trade imbalance, it will be difficult to return to the stronger growth patterns of the postwar years, Wyss says.

So if this time really is different, what's the difference? Economists say there are near-term factors related to the recent downturn, as well as longer-term changes in the makeup of the economy that could lead to a decade of slow growth. Here are five areas weighing down projections for the next 10 years:

1. Commercial real estate
Members of the Federal Reserve Board have cited commercial real estate as a near-term concern for the strength of the recovery. Weakness in this sector will be a significant drag on gross domestic product for the fourth quarter of 2009, the first quarter of 2010 and possibly beyond, as construction continues to contract and lenders are forced to take further write-downs, says Keith Hembre, the chief economist for First American Funds.

Because commercial-real-estate loans are typically held by smaller regional banks, the sector doesn't pose the same systemic threat that the trouble with residential real estate did, Johnson says. Small banks can and do fail without threatening the health of the economy, he says. Commercial real estate is also typically a lagging indicator, so continued weakness in this sector doesn't undermine the case that recovery is under way, says John Canally, an economist with LPL Financial.

2. Business spending
Businesses' access to credit, and thus their ability to make new investments, will remain constrained for some time, Wyss says. With the government borrowing so much to finance the bailouts and economic stimulus, there's less capital available for the private sector to borrow, he says.

Businesses are likely to remain cautious about hiring workers. That won't necessarily lead to a double-dip recession, but it could set the pace for a sort of half-speed recovery that remains vulnerable to another shock, Wyss says.

Economists' predictions for 2010 and beyond

3. Demographic changes
An aging population means a labor force that grows more slowly than it did for much of the post-WWII period, Johnson says. A resulting younger work force is typically less productive than an older work force, he says.

The number of people in their peak spending years (around age 50) will also start to decline as baby boomers age. However, boomers appear likely to postpone retirement out of necessity or inclination, and they may not cut back significantly on spending even when they do retire, Canally says.
Economy sheds more jobs than expected

The shift to an older population has longer-term implications beyond just the next decade as baby boomers retire.

"Long term, the worry is we have a society where the elderly soak up public funds at the expense of education and the young," Wyss says. Over the next generation, a lack of funding for education could lead to a "mismatch between the work force we need and the work force we're creating," he says.

4. Slower productivity growth
With the labor force growing slowly, economic growth will have to be driven largely by gains in productivity, Hembre says. Higher taxes and increased regulation could put a damper on innovation and slow productivity growth, he says.

Over the past 15 years, increased international trade has led to increased efficiencies, but we're unlikely to see the same kind of growth in trade in the next 15 years, Hembre says.

Technological breakthroughs that could significantly increase productivity are difficult to predict, Wyss says. However, innovations often come from the kind of smaller, risk-taking companies that are having particular trouble accessing credit right now, he says.
5. Changing spending habits
If American consumers make permanent changes in their spending habits as a result of the recession, growth could be restrained for a generation.

However, the fear of a newly restrained American shopper may be overdone, says Robert Brusca, the chief economist for Fact & Opinion Economics.

"I don't believe in this economic fairy tale where people have learned their lesson," Brusca says. "People have houses, they have jobs, they have ways of life, and they're going to try to get back to them."

This article was reported by Sarah Morgan for SmartMoney.

http://articles.moneycentral.msn.com/In ... overy.aspx

These statistics don't measure overall quality of life. Houses, for example, are much better constructed, comfortable and energy efficient due to gradual improvements in codes and in the quality of components and materials. People spend less time on maintenance than they ever did. Autos are much safer and now even have communication features. Healthcare improvements have been phenomenal, enabling people to accomplish more and not be sidelined so easily by chronic diseases.

True...the demographic statistics will have a huge impact. Baby boomers will be pulling money out of stocks at incredible figures. Plus, our defeat of open immigration may curtail a large share of corporate expansion, which tends to pump up the "statistics." But we will get it back in quality of life. Many of these businesses are unnecessary anyway.