Economic Recovery: Unusual Shape, Unusual Style

Despite the volatility of monthly economic releases and policy prescriptions, surprisingly little in the outlook has deviated from the pattern of the recovery as outlined in our annual outlook published last December. Economic recovery is expected to start later this year. Weakness in consumer spending has begun to give way to gradual improvement. Business spending continues to decline. Housing remains weak. A significant inventory correction in early 2009, combined with a gradual recovery in final sales, produces an improvement in aggregate demand. Inflation remains low while corporate profits remain weak. Federal Reserve policy has kept short rates low while long Treasury rates are expected to rise.

While this recovery has followed traditional patterns, we continue to see that the recovery will differ in both character (less diversified) and strength (weaker) relative to past recoveries. The recovery will disappoint both citizens and policymakers, which will mean more difficult decisions. A subpar recovery in output, employment and consumer incomes will mean consumer, housing, commercial real estate and government spending will not return to what many would perceive as normal. An ongoing economic and psychological adjustment to a new, lower equilibrium long-run growth rate for the economy will drive choices on the limits of our economic resources to meet our aspirations in a global economy.