AP survey: Recovery to remain sluggish into 2011

In the April 12, 2010 article "AP survey: Recovery to remain sluggish into 2011," Associated Press economics writer Jeannine Aversa says a survey of economists suggests U.S. economic growth will remain quite modest until at least 2011.

"Among the first survey's key findings:
• The unemployment rate will stay stubbornly high the next two years. It will inch down to 9.3 percent by the end of this year and to 8.4 percent by the end of 2011. The rate has been 9.7 percent since January. When the recession started in December 2007, unemployment was 5 percent.
• Home prices will remain almost flat for the next two years, even after plunging an average 30 percent nationally since their peak in 2006. The economists forecast no rise this year and a 2.3 percent gain next year.
• The economy will grow 3 percent this year, which is less than usual during the early phase of a recovery and the reason unemployment will stay high. It takes growth of 5 percent for a year to lower the jobless rate by 1 percentage point, economists say."

Even as economy mends, a jobless decade may loom

In the December 26, 2009 article "Even as economy mends, a jobless decade may loom," Associated Press economics writer Jeannine Aversa reports the United States could have high unemployment rates until at least 2015. Last year I cautioned that whoever won the 2008 U.S. Presidential election would endure a prolonged economic slowdown and would probably receive more blame than he or she deserves. We will see.

WASHINGTON (AP) -- Call it the Terrible Teens.

The decade ahead could be a brutal one for America's unemployed -- and for people with jobs hoping for pay raises.

At best, it could take until the middle of the decade for the nation to generate enough jobs to drive down the unemployment rate to a normal 5 or 6 percent and keep it there. At worst, that won't happen until much later -- perhaps not until the next decade.

The deepest and most enduring recession since the 1930s has battered America's work force.

The unemployed number 15.4 million. The jobless rate is 10 percent. More than 7 million jobs have vanished. People out of work at least six months number a record 5.9 million. And household income, adjusted for inflation, has shrunk in the past decade.

Most economists say it could take at least until 2015 for the unemployment rate to drop down to a historically more normal 5.5 percent. And with the job market likely to stay weak, some also foresee another decade of wage stagnation.

Even though the economy will likely keep growing, the pace is expected to be plodding. That will make employers reluctant to hire. Further contributing to high unemployment is the likelihood of more people competing for jobs, baby boomers delaying retirement and interest rates edging higher.

All this would come after a decade that created relatively few jobs: a net total of just 464,000. By contrast, 21.7 million new jobs were generated between 1989 and 1999.

Economist David Levy, chairman of the Jerome Levy Forecasting Center, says the country faces a new era of chronically high unemployment, averaging 8 percent or more over the next decade.

The "New Abnormal," he calls it.

Levy thinks the New Abnormal also means average pay will dwindle, along with consumer prices. That would make it harder for households to pay down debt, he warns.

By the Federal Reserve's reckoning, the jobless rate could remain as high as 7.6 percent in 2012. And it would take two or three years after that for the job market to return to normal, the Fed says.

It's possible jobs won't return to pre-recession levels at any point over the next 10 years, Levy says.

That's mainly because the economy's recovery, sluggish by historical standards, isn't expected to regain its vigor over the next few years. As a result, companies will be in no rush to ramp up hiring.

Other analysts think the economy will recover the jobs wiped out by the recession by 2013 or 2014 but that the unemployment rate will stay high. They note that the healing economy will cause more people to stream back into the labor force, vying for too-few jobs.

In addition, baby boomers whose retirement accounts have shrunk could put off retiring and stay in the work force longer. That would leave fewer positions available for the unemployed.

Other contributing forces -- businesses squeezing more work from employees they still have and relying more on part-time and overseas help -- have intensified. And record-high federal budget deficits and the threat of inflation could drive up interest rates, which could hobble growth and restrict job creation.

All those factors could combine to keep unemployment high.

"It will be the mother of all jobless recoveries," predicts economic historian John Steel Gordon.

On the other hand, it's possible some technological innovation not yet envisioned could generate a wave of jobs. Yet at the moment, most economists aren't betting that any such breakthroughs will rescue the labor market.

The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.

Unemployment hit a post-World War II high of 10.8 percent at the end of 1982 as the country was emerging from a severe recession. The rate fell to around 5 percent in 1988. It took less than two years for the number of jobs to return to its pre-recession level.

In this recovery, the economy is far more fragile.

Hard-to-get credit is exerting a drag. Wounds from the banking system's worst crisis since the Great Depression will take years to fully heal. People and companies, scarred by the crisis, are likely to restrain borrowing, spending and investing.

Some analysts think the jobless rate might have already peaked at 10.2 percent in October. But most economists predict the rate will peak at around 10.5 percent by the middle of next year.

"We are digging out of a very deep hole," says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and chief economist for the National Association for Business Economics.

Reaser estimates it will take until 2015 for the unemployment rate to drop to 5.5 percent.

A sputtering job market carries other consequences. One is flat wages. When many people compete for few jobs, employers have no incentive to raise pay.

The economic shocks of the past decade already have cut into Americans' incomes. That's among the reasons why people feel they're standing still economically.

Median household income, adjusted for inflation, fell to $50,303 in 2008, according to the U.S. Census. That gauge combines wages and salaries, investment income and government benefit payments like Social Security. It's down 4 percent from a peak of $52,587 in 1999, when incomes were bolstered by stock gains from the dot-com boom.

That bubble burst in 2000. Since then, workers have seen meager wage gains. Adjusted for inflation, wages grew about 13 percent in the past 10 years -- the slowest pace in five decades, according to calculations made by Scott Hoyt of Moody's Economy.com.

That trend is predicted to continue.

"There will be a continued hollowing-out of the middle class," says H.W. Brands, a historian at the University of Texas.

He points to productivity growth, which has let companies produce more with leaner work forces, the offshoring of service-sector jobs and the shrinking of factory jobs.

That's why Vicki Adriano, 51, who works at a General Motors plant in Lordstown, Ohio, looks ahead to the coming decade with trepidation.

The economic wreckage of the past year means she'll probably have to work longer than she had expected at the factory-- at least seven more years. She frets about the loss of economic security.

"Everything you worked for all those years can be gone in a minute," she says.

Goldman foretells an unemployment nightmare

In the December 3, 2009 Salon article "Goldman foretells an unemployment nightmare," Andrew Leonard says the "worst-case scenario for Democrats: A jobless rate over 10 percent all the way into 2011."

Just in time for President Obama's jobs summit, Reuters columnist James Pethoukoukis gives us a glimpse at Goldman Sachs' economic outlook, compiled by ace forecaster Jan Hatzius. (Found via Calculated Risk.)

The key line:

...(2) a peaking in unemployment in mid-2011 at about 10 3/4 percent.

The unemployment rate sits at 10.2 percent right now. The prospect that it might remain above 10 percent for another year and a half is, as Pethokoukis rightly points out, a massive political disaster in the making for Democrats.

Other forecasts have predicted that unemployment would peak in the first quarter of 2010 and then start to slowly fall, but an article published today in Bloomberg News ranks Hatzius as the most accurate economic forecaster on Wall Street, so his doom-and-gloom cannot lightly be ignored.

On a happier note, there appears to be real momentum on the weekly jobless claims front, with new filings for benefits falling for the fifth straight week to the lowest point in more than a year, and with the four-week moving average dropping like a rock. But that's a slender thread upon which to hang, when faced with the scenario foretold by Hatzius.

Goldman Sachs 2011 forecast would be an absolute disaster for Dems

In the December 2, 2009 Reuters article "Goldman Sachs 2011 forecast would be an absolute disaster for Dems," James Pethokoukis reports on the pessimistic forecast for U.S. economic conditions.

"This would be New Normal with extreme prejudice. Bad for Democratic incumbents in the 2010 congressional midterms, but it should make the White House political team nervous as well for 2012. If Goldman Sachs is right, of course. Here is the firm’s 2011 forecast:

The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011.

That said we see risks that could upset these markets. On the one hand, we might be underestimating the vigor of the economic recovery, and therefore the pressures for Fed tightening. In addition, surging asset prices and worries about a “bubble” could prompt Fed officials to tighten before such a move seems warranted on real-economy grounds. On the other hand, the economy (and the markets) could struggle under the weight of credit restraint for small businesses, weakness in commercial real estate markets, or fiscal tightening, especially by state and local governments.

The implications? I hardly know where to begin: a) with unemployment rising all next year, a GOP blowout in 2010; b) certainly more job creation packages; c) no capandtrade; d) increased anti-Wall Street/Fed sentiment; e) third party prez candidate in 2012; an Obama challenger in 2012 (Dean?). But who really knows. This would be like a technological singularity where seeing beyond the event is pretty much impossible. Such a Long Recession (essentially) would be so contrary to American expecatations — such a slow-mo, psychological shock — that it would be a full-out system perturbation equivalent to 9-11 or the Iraq War."

Some economists warn Barack Obama's economic predictions too optimistic

According to a July 14, 2009 article by Jeanne Cummings in Politico,"
Some economists warn Barack Obama's economic predictions are too optimistic."

President Barack Obama’s economic forecasts for long-term growth are too optimistic, many economists warn, a miscalculation that would mean budget deficits will be much higher than the administration is now acknowledging.

The White House will be forced to confront the disconnect between its original, upbeat predictions and the mainstream consensus about how the economy is likely to perform in a new budget forecast to be unveiled next month.

Christina Romer, chairwoman of the White House’s Council of Economic Advisers, said in a POLITICO interview that the administration — like many independent economists — did not fully anticipate the severity and pace of this recession. She said the White House will be updating its official forecasts.

The new numbers will come as part of a semiannual review that, under ordinary circumstances, is the kind of earnest-but-dull document that causes many Washington eyes to glaze over.

This time, however, the new forecasts — if they are anything like what many outside economists expect — could send a jolt through Capitol Hill, where even the administration’s current debt projections already are prompting deep concerns on political and substantive grounds.

Higher deficit figures also would arrive at a critical moment in the health care debate, as lawmakers are already struggling to find a way to pay for the president’s nearly $1 trillion reform package.

Alternately, if Obama clings to current optimistic forecasts for long-term growth, he risks accusations that he is basing his fiscal plans on fictitious assumptions — precisely the sort of charge he once leveled against the Bush administration.
White House officials rebuff such suggestions, saying the midyear correction is precisely intended to keep their economic program reality based.

But a series of POLITICO interviews in recent days with independent economists of varied political stripes found widespread disdain for Obama’s first round of assumptions, with some experts invoking such phrases as “rosy” and “fantasy.”
Obama’s current forecasts envision 3.2 percent growth next year, 4 percent growth in 2011, 4.6 percent growth in 2012 and 4.2 percent growth in 2013.

The administration is already under intense pressure over its economic calculations on the most politically sensitive statistic: employment. The administration once vowed to use stimulus policies to keep the jobless rate below 8 percent; it is now just shy of 10 percent.

Deficit figures do not pack the same emotional punch as unemployment lines do. But they matter greatly to policymakers and the financial markets as a measure of whether the country can afford Obama’s big agenda.

And the general public is paying attention, too.

In a June NBC/Wall Street Journal poll, a bare majority — 51 percent — of respondents approved of Obama’s handling of the economy, down from 56 percent in February.

In addition, 58 percent said the president and Congress should focus on keeping deficits down, even if that delays an economic recovery, the poll found.

“They used a rosy forecast, and that’s understandable because a quick recovery makes the rest of the agenda possible. It creates the basis for the revenues you need for health care and climate change,” said Robert Shapiro, a former Clinton economic adviser.

“But it’s also dangerous and risky because if the forecast doesn’t come true, you’ve undermined the basis for the rest of your policies,” he added.

White House officials note that at the time of their forecasting, the depth of the crisis was less clear. For instance, the global reach of the downturn wasn’t fully apparent late last fall.

Another challenge was that the slowdown “was going from a relatively normal recession into something much worse, and we were at a pivot point, if not a turning point,” Romer said.

“There was just inherently a lot of uncertainty. None of us has a crystal ball, especially at a time when there is a lot of new information coming in. That’s when you have to be ready to update. That’s certainly what a lot of forecasters have done and what we will do, as well,” she added.

Those outside forecast adjustments have been almost universally in a downward trend.

White House officials began to lay the groundwork for the politically ill-timed revisions when Vice President Joe Biden recently conceded the administration had “misread” the economic indicators in January about how bad the economy actually was.

Obama later amended those remarks, saying the White House had “incomplete” information, which led to their miscalculations.

Either way, those admissions appear to pave the way for a significant rewrite of the White House’s economic outlook, starting with it growth predictions.

“Those numbers will prove to be much, much too optimistic,” said J.D. Foster, a former economic adviser in the Bush administration.

To appreciate the potential problems that can arise once those numbers are changed, consider this:

The White House projected revenues for 2012 are forecast at $3.1 trillion. But if growth is just 2 percent, rather than around 4 percent, as some economists now expect, that income would hover around $2.4 trillion — adding another $700 billion to the projected deficit of $581 billion.

“That would be a significant change in the deficit,” said Foster, who did the math.

There is a case for hewing close to the administration’s original, out-year conclusions, said some economists.

The president’s hope for a burst of new economic activity around “green” jobs in the energy and environment sectors and the kick-in of the infrastructure phase of the stimulus package could provide some healthy growth, economists say.

“The question is, what will drive the growth? It’s not likely to be the housing market or another tech bubble. We don’t know what it is going to be, but it doesn’t make sense to assume it won’t be anything,” said James Horney, an economist with the Center on Budget and Policy Priorities.

Still, it’s not clear whether another optimistic outlook will sell on Capitol Hill.

Mark Zandi, chief economist for Moody’s Economy.com and a frequent adviser to Capitol Hill, said the worsening economic picture makes passage of health care reform even more essential.

“It’s so important for policymakers to show that they will address the long-term fiscal pressures on the economy and budget very, very soon,” he said, including the rising costs of Medicare and Medicaid that are overwhelming the federal budget.

The key for outside investors, he said, is “to see if policymakers credibly pay for it.” If Congress does it right, “that could be quite a positive thing” by boosting U.S. credibility in the world markets that are financing the nation’s debt.

Roger C. Altman, another former Clinton economic adviser, recently suggested in a Wall Street Journal column that Congress move aggressively on health care reform and Social Security — both fixes that could ease deficit pressures.

“Public anxiety over deficits may make this fix [of Social Security funding] possible now, even though it has been elusive for years,” he said.

But Peter Morici, a University of Maryland economist, said the White House should set aside major domestic initiatives and focus on stabilizing the economy by attacking the trade deficit.

“The spending required for health care, the tax on business with a [climate change] cap-and-trade system, and the wasteful spending inside the stimulus will finish the job that the Chinese mercantilism began,” he said. “We’re headed for a disaster here.”

Go slow is also Shapiro’s guidance, suggesting a phased-in approach to any universal health care insurance program, which would delay its full costs.

Almost all of the economists interviewed — including former Bush White House officials — were sympathetic to the Obama economic team’s plight.

Its January forecasts didn’t deviate sharply back, then, from most other predictions by established and respected economic experts.

The Congressional Budget Office, for instance, predicted growth in 2012 of 4.4 percent, compared with the White House’s 4.6 percent.

But some worry the administration now is on the verge of making another mistake by inadequately addressing the next big threat: inflation fears.

No one can predict when that day will come, but many think now that it will be sooner rather than later.

When it does come, the Federal Reserve Bank will face a Hobson’s choice, said Morici: either runaway inflation or higher interest rates, both of which could stall a recovery and send the economy back into recession.

The Fed’s decision to pump money into the economy to stave off disaster in the financial sector and elsewhere last year was understandable, said Foster.

“But a price must be paid for what they did,” he added, and that means withdrawing that liquidity from the market to combat inflation. “In this case, the amount of liquidity to be withdrawn is unprecedented,” he added.

Zandi doesn’t dismiss Foster’s scenario, but he said it’s possible the country could get through inflation scares without as much damage.

“I think policymakers will do roughly the right thing with health care reform and get a reasonably credible package from a fiscal perspective,” he said.

“Then the current stimulus will be reasonably sufficient to push us out of recession later this year and into early recovery,” he added.

http://news.yahoo.com/s/politico/20090714/pl_politico/24899