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Wednesday, September 19, 2018

Nine Years Ago: Fast or Sluggish Recovery?

by Calculated Risk on 9/19/2018 04:05:00 PM

This is my 14th year writing this blog, and sometimes it is fun to look back at earlier predictions.

In the early stages of the recovery (September 2009), a number of analysts were predicting a rapid recovery (see: A couple of Bullish Views). My view was that the recovery would be sluggish.  First, I quoted from some optimistic views, and then wrote:

I disagree with these views. … Although I started the year expecting a bottom in new home sales and single family housing starts (and it appears that has happened), there is still too much existing home inventory for much of an increase in the short term.
[C]onsumers will remain under pressure as they repair their household balance sheets … This time housing will remain under pressure until the number of excess housing units (both owner occupied and rentals) decline to more normal levels.

So I think an "Immaculate Recovery" is very unlikely.
Note: Housing starts did bottom in 2009, and then mostly moved sideways for the next couple of years.

House prices didn't bottom for a few more years (from February 2012: The Housing Bottom is Here).

Total Household Debt Click on graph for larger image.

And, according to the NY Fed, household debt didn't bottom until Q2 2013.

This graph shows aggregate consumer debt.  Household debt previously peaked in 2008, and bottomed in Q2 2013.

Housing and household debt were drags on the economy for several years, and the recovery was sluggish. In addition, demographics weren't favorable (see: Demographics and GDP: 2% is the new 4%)
[U]sually following a recession, there is a brief period of above average growth - but not this time due to the financial crisis and need for households to deleverage. So we didn't see a strong bounce back (sluggish growth was predict on the blog for the first years of the recovery). … And overall, we should have been expecting slower growth this decade due to demographics - even without the housing bubble-bust and financial crisis.
For 2018, most analysts (including me) predicted a pickup in growth, for example on Jan 1, 2018, I wrote:
The new tax policy should boost the economy a little in 2018, and there will probably be some further economic boost from oil sector investment in 2018 since oil prices have increased recently. Also the housing recovery is ongoing, however auto sales are mostly moving sideways.

And demographics are improving (the prime working age population is growing about 0.5% per year, compared to declining a few years ago).

All these factors combined will probably push GDP growth into the mid-to-high 2% range in 2018. And a 3% handle is possible if there is some pickup in productivity.
Recently the discussion has turned to the causes and timing of the next recession. See my Update: Predicting the Next Recession and Professor Krugman's column today: A Smorgasbord Recession? (Wonkish) .  For now, the economy is fine (I'm not on recession watch).