The Great "Reset"

Abstract

THE GREAT “RESET” U.S. Macroeconomic Outlook Recent consumer spending, home and retail sales, and industrial production reports suggest that the economy may be nearing a turning point, and that the recession will end later this year. But, even if this happens, the U.S. economy will still face major challenges. The economy has dug itself a deep hole, with very high levels of unemployment. Further, there are reasons to expect an anemic and perhaps even unsteady recovery, rather than rapid expansion that often occurs at the end of a recession. First, consumption is not likely to return to pre-recession levels in the near future. This is because consumers have experienced a rapid decline in their wealth, through falling stock values, and in some parts of the country, a steep decline in home values of between 30% and 50%. With less wealth, consumers will save more and spend less. Second, the U.S. economy still faces major imbalances in several key markets. The already weak financial sector will face rising home foreclosures and bankruptcies in commercial properties. These same forces will prevent a robust recovery in the housing and auto sectors. Home prices will not begin to recover until 2010, and construction and automobile production will remain well below normal levels next year. As a result, when the recession ends we do not expect a period of rapid growth, typical of most recoveries, where the economy quickly returns to pre-recession levels. The economy is much more likely to “reset” to current levels of output and employment and enter a period of slow expansion. When the recession ends, the economy will grow again from these new, lower levels, but growth will only reach trend rates of 2% to 3%. Under this “reset” scenario, it will take several years for consumption and gross domestic product to return to late 2007 levels. The recession may end but it will take several years for the national economy to approach more normal rates of capacity utilization and unemployment. As the preceding suggests, the Nebraska Business Forecast Council is pessimistic about the national economic outlook. In fact, we are now slightly more pessimistic than in our previous outlook released in January 2009. We continue to believe that the national economy will return to GDP growth before the end of 2009. But, we are now more pessimistic about the strength of the ensuing economic recovery, particularly in 2010. This is because the housing and auto sectors have been even weaker than we anticipated. We now expect the U.S. GDP will decline by 3% in 2009, before growing just 2.5% in 2010, and 3% in 2011. U.S. non-farm employment is expected to decline by 3.5% in 2009, and fall 0.5% in 2010 before growing by just 1.1% in 2011. U.S. unemployment will reach 10%. Signs of inflation will only appear in late 2011. Given this national outlook we must be concerned for those Nebraska workers and businesses dislocated by the current recession. But, overall, the economic situation will not be as dire in Nebraska as nationwide. The decline in property wealth and the increase in unemployment have not been as severe here. As a result, the recession will not be as deep in Nebraska. Nebraska Outlook Employment Construction and Mining Manufacturing Transportation and Utilities Wholesale Trade Retail Trade Information Financial Services Services Government Personal Income Nonfarm Personal Income Farm Income Net Taxable Retail Sales Our Thanks … The Bureau of Business Research is grateful for the help of the Nebraska Business Forecast Council. Serving this session were John Austin, Department of Economics, UNL; Chris Decker, Department of Economics, UNO; Tom Doering, Nebraska Department of Economic Development; Bruce Johnson, Department of Agricultural Economics, UNL; Ken Lemke, Nebraska Public Power District; Shannon Ramaeker, Nebraska Department of Labor; Franz Schwarz, Nebraska Department of Revenue; Scott Strain, Greater Omaha Chamber of Commerce; Eric Thompson, Bureau of Business Research, UNL; Keith Turner, Department of Economics, UNO (emeritus)

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