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Tuesday, May 12, 2009

Immaculate Recovery?

by Calculated Risk on 5/12/2009 02:32:00 PM

GE Chief Executive Jeff Immelt is uncertain when growth will resume ...

From Reuters: GE CEO says economy stabilized, growth a question

Improved credit markets have brought stabilization to the economy but it is still not clear when growth will resume, General Electric Co Chief Executive Jeff Immelt said on Tuesday.

"The credit picture, we think, is improving and that's really one of the fundamentals to getting the broader economy doing better," Immelt said in an interview with Reuters. "Things certainly have stabilized and now the goal is to see where growth goes in the second half of the year."
And from PIMCO's El-Erian:
It was clear to us that, despite the very high hurdle that we always apply to such a statement, the world has changed in a manner that is unlikely to be reversed over the next few years. Put another way, markets are recovering from a shock that goes way, way beyond a cyclical flesh wound.
...
For the next 3–5 years, we expect a world of muted growth ...
And Bloomberg quotes Paul Krugman:
“It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Krugman said at a forum in Shanghai today. “The market seems to be looking as if this is going to be an average recession, but it’s not.”
I thought a depression was unlikely, and I think an immaculate recovery is also unlikely. Something in the middle - that will feel like a recession to many - is more likely.

As I noted last week (see A Return to Trend Growth in 2010? and The Impact of Changes in the Saving Rate on PCE ), the usual engines of recovery - personal consumption expenditures (PCE) and residential investment (RI) - will both remain under pressure (even if they show some sluggish growth).

My forecast is for unemployment to stay elevated for some time, and the suggests minimal wage growth. And I also think household will increase their saving rate to repair their household balance sheet (and because of an aging population). This suggests PCE growth will probably be below trend.

And for RI, there is far too much inventory for any significant rebound in new home construction. So where will the growth come from?