The near-term outlook for the national economy continues to improve, but full recovery will be slow in coming. After decreasing this year, Gross Domestic Product (GDP) is expected to grow next year, but hundreds of thousands more jobs will be lost and unemployment will increase into 2010. U.S. nonfarm jobs will not grow for the year as a whole until 2011, and it will take another two years to finally get employment rolls back to the level recorded in 2007. In all, economic problems are expected to extend in varying degrees of severity for several more years.
The dominant perspective among analysts who track quarterly changes in GDP, our measure of national output, is that the third quarter should bring positive growth, after four quarters of contraction. By this standard, the most severe recession since the Great Depression ended sometime this summer.
The W. P. Carey Round Number Forecast has been adjusted accordingly (see forecast table at Economy@W. P. Carey). The projection for third quarter (annualized) growth in real GDP has been raised to 3.0 percent. In the fourth quarter, GDP growth remains positive but drops back below one percent. The reasoning is that the surge of consumer spending in Q3 drew from Q4, undermining later growth.
The return to positive growth in the second half of 2009 is not sufficient to avoid an overall decline in GDP for 2009 of -2.5 percent. Going forward, in 2010 the economy sputters ahead with a positive but subpar advance of 2.5 percent. Most analysts expect that job losses will continue into 2010, and unemployment will peak in that year before heading back down.
The table below sets out a first look at how key indicators might behave in the aftermath of recession. The recovery is expected to be u-shaped, not a sharp v of accelerating growth out of the deep downturn experienced since December of 2007. The 5-year timeline for the recovery scenario is based on simple extrapolation of current trends and typical growth patterns during previous recoveries for the national economy.
Residential construction bottoms out; businesses begin to rebuild inventories; GDP positive in second half but declines for year as a whole; job losses continue, unemployment increases; federal deficit of $1.5 trillion is three times the size of 2008 deficit.
All components of GDP (consumption, business investment, exports and government) post positive growth, with the exception of commercial/nonresidential building; unemployment peaks above 10 percent; job losses end and economy adds new jobs in second half.
Nonresidential building recovers; residential housing starts exceed 1 million units; unemployment still above 9 percent but economy adds more than 2 million jobs for the year
GDP growth surpasses 3.0 percent for first time since 2005; unemployment still above 8 percent but annual job growth exceeds 3 million per year; housing starts exceed 1.5 million units; auto sales exceed 15 million units.
Employment returns to 2007 levels; auto sales reach new record of 17 million units; nonresidential building grows at double digit pace; unemployment below 8 percent
Source: Estimates compiled by JPMorgan Chase Economic Outlook Center, W. P. Carey School of Business, Arizona State University
The problems in the commercial real estate sector are expected to become more severe in 2010. Vacancy rates will rise, revenues decline, and delinquencies accumulate in retail, industrial, office and other commercial properties. Although GDP growth should be positive each quarter of the year, the unemployment rate will continue to increase as former discouraged workers come back into the labor force and cautious businesses are slow to add to payrolls.
By 2011, residential housing starts will surpass the one-million mark. This spurs employment in construction and related industries. New homes and new neighborhoods will boost nonresidential commercial building in both the public and private sector. If job growth in 2011 is 1.5 percent or better, the economy will produce 2 million jobs in that year. The consumer will be reinvigorated and spending on consumer durables such as autos, appliance and electronics would take a sharp jump.
The most recent year that GDP growth exceeded 2 percent was in 2005 (3.1 percent). GDP could reasonably reach 3 percent real growth again in 2012, five years after the start of the recession in 2007. However, unemployment would still likely be 8 percent or more in 2012.
By 2013 the economy could be in full recovery mode. Unemployment would dip below 8 percent for the first time since 2008. After six years, labor markets would finally return to the overall level of employment last seen in 2007. All the jobs lost during the three-year period of job losses (2008, 2009, and 2010) would be restored by 2013, as employment surpassed 140 million, an all-time national high.
Although the national consensus among economic analysts seems to be that the recession is over, the recovery scenario here suggests that it may be several years before GDP is growing at a rate sufficient to restore labor markets to pre-recession levels. Moreover, this rebound scenario ignores the possibility of shocks from domestic or global sources that could waylay the economy along the path to sustained growth. The green shoots of recovery may yet shrivel on the vine, but as of now, most observers are more optimistic now than at any time in the past two years.