Tuesday, June 15, 2010

UCLA's Leamer: "A Homeless Recovery"

by Calculated Risk on 6/15/2010 12:14:00 PM

From UCLA: UCLA Anderson Forecast: U.S. recovery a long, slow climb; Calif. recovery weaker than nation's

"If the next year is going to bring exceptional growth," [UCLA Anderson Forecast director Edward] Leamer writes, "consumers will need to express their optimism in the way that really counts — buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts — by not hiring workers."

The result is an economic Catch-22.

Leamer explains that significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.
A couple of key points:

  • Usually housing (residential investment) is a key engine of growth in a recovery, for both GDP and employment, but this time any contribution from housing will be muted. Normally in a recovery housing is a leading sector, and the pickup in residential investment leads to more jobs - and more households - and more demand for housing. This is not happening now because of the huge overhang of existing inventory. Right how the recovery is "homeless", and that means any recovery in GDP and employment will be sluggish.

  • The sluggish GDP growth implies that the unemployment rate will stay elevated for some time. Leamer is forecasting the unemployment rate will decline slowly to 8.6% in 2012! Ouch. However, he is also forecasting that the Fed will raise rates early in 2011, but that is very unlikely based on his unemployment rate forecast.