The path to economic recovery is a marathon, not a sprint
ANN ARBOR—Although the nation’s economy has started to improve this fall, the next two years will bring only moderate economic growth, generating just enough jobs to slowly reduce unemployment, say economists at the University of Michigan.
“Job gains have picked up a notch, consumer sentiment has recouped about half the ground lost this summer and the chances of another downturn have diminished,” said economist Joan Crary. “History shows, however, that it is much more difficult to recover after a financial crisis like the Great Recession than it is after a more typical recession, and policymakers are still struggling with ways to restore balance to the economy.”
“It seems likely that the path of this recovery will continue to be a marathon, not a sprint.”
In their annual forecast of the U.S. economy, Crary and colleagues Daniil Manaenkov and Matthew Hall predict economic output growth (as measured by real Gross Domestic Product) of about 2.5 percent in both 2012 and 2013—up from this year’s projected 1.8 percent growth.
After enduring the worst back-to-back years of job loss in more than 50 years during 2008 and 2009, the U.S. economy added 700,000 jobs last year and 1.5 million this year. Nearly 4 million jobs will be added over the next two years—1.9 million during 2012 and 2 million during 2013—the economists say.
The unemployment rate, currently hovering around 9 percent, will steadily edge downward to 8.8 percent in late 2012 and 8.5 percent a year later, they say.
“With slightly stronger growth projected over the next two years, job creation picks up to average about 170,000 jobs per month over the forecast horizon,” Crary said. “The unemployment rate begins to creep down but remains uncomfortably high even at the end of 2013—four-and-a-half years after the official end of the recession.”
In addition to modest growth in GDP and employment over the next two years, the U-M economists say that housing starts will continue to improve during that time. This year, single-family housing construction is at an all-time low of 420,000 units.
Total housing starts (which include both single-family and multifamily units) will creep upward from 600,000 units in 2011 to 730,000 next year and 950,000 in 2013. By comparison, total starts exceeded one million units each year between 1954 and 2007.
“Recovery in residential construction investment has historically led the U.S. economy out of recessions, but this time the housing recovery has been nonexistent, resulting in subpar economic growth,” Manaenkov said. “The dynamics of housing prices are the key to future investment in new housing construction.
“Until prices stop falling, there is a powerful incentive for qualified buyers to wait for lower prices, delaying the necessary process of clearing the excess inventory of existing houses left over by the collapse of the bubble. The longer it takes to clear this inventory, the longer we will have to wait for the construction of new homes to pick up.”
Although existing home sales are up slightly this year (4.37 million units) and are expected to rise over the next two years (4.55 million in 2012 and 4.87 million in 2013), the recovery is still extremely weak, the economists say.
According to the forecast, despite a mid-year drop in light vehicle sales—due to supply chain disruptions caused by the Japan earthquake and tsunami—12.7 million units will be sold overall this year, up from 11.6 million units last year. Sales then rise to 13.5 million in 2012 and to 14.3 million in 2013—still 3 million shy of their peak in 2000.
Finally, the U-M economists say that both inflation and interest rates will be fairly low over the next two years. Despite a steady rise in oil prices, consumer price inflation is projected to moderate from 3.2 percent this year to about 2 percent.
Conventional mortgage rates will remain flat at about 4.1 percent during 2012, before inching upward to 4.5 percent by the end of 2013—still an attractive rate by historical standards.
The three-month Treasury bill rate will range from 0.1 percent to 0.2 percent and the 10-year Treasury note will edge upward from about 2.2 percent to 2.9 percent by the end of 2013.
Overall, the U-M economists say that a number of developments throughout 2011 have made it difficult to judge the underlying strength of the U.S. economy.
“It is likely that the Fed has decided to wait for the economic picture to sharpen a bit before deciding whether to administer another dose of monetary stimulus,” Manaenkov said. “It is hard to imagine, however, that the Fed will abstain from action for much longer given the combination of disturbingly high unemployment rate projections and the expected lack of inflation pressures.
“In all, the course of the economy over the next two years will be influenced by how Congress chooses to deal with the budget both in the near and longer term, what new tools, if any, the Federal Reserve chooses to employ to support additional growth, and how the economies of Europe and our other trading partners fare.”
The U-M forecast is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics. For more information, visit www.umich.edu/~rsqe.