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The Post Asks Economists Whether the Worst of the Recession is Over

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Thursday, August 13, 2009

The Post asked economists if they agreed with the Federal Reserve's statement Wednesday, following a better-than-expected employment report and brisk auto sales, that the economy is "leveling out." Below are responsese from Douglas Holtz-Eakin, Alice Rivlin, Diane Lim Rogers, Kenneth Rogoff, Rudolph G. Penner and Mark Zandi.

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DOUGLAS HOLTZ-EAKIN

Former director of the Congressional Budget Office; senior economic adviser to Sen. John McCain's presidential campaign

If America were populated only by economic statisticians (a frightening image) then the worst would be over. Reams of economic data support the notion that, in the words of the Federal Reserve, "the economy is leveling out." Unfortunately, the labor market remains very weak, unemployment is more likely to rise again than to fall, and real labor income is essentially flat. That combination offers little relief to U.S. households, which entered this recession highly indebted. Americans are facing an ongoing foreclosure crisis and have suffered losses on their investment portfolios. It is not surprising that consumer confidence remains weak.

At the same time, the federal budget is in disastrous shape, and the Fed's massive liquidity injections pose a risk of a significant uptick in inflation in the years to come. Americans face the real possibility that "recovery" will consist of paring spending to rebuild wealth, paying higher taxes and facing higher inflation. A new generation may be exposed to the frustrating coincidence of chronically high unemployment and rising prices. So the numbers will be better, but the American psyche will take longer to recover.

ALICE RIVLIN

Senior fellow at the Brookings Institution; founding director of the Congressional Budget Office; director of the Office of Management and Budget, 1994-96

If you have lost your job, the worst may not be over for a long time. If you have a job, you may still lose it. The main reason for optimism is that the rapid deterioration of the economy has slowed down. Production and sales may even start increasing gradually in the next few months. For many businesses, the worst may be over. But don't expect a bounce. Scared consumers are hanging on to their cash, bemoaning the lost value of their houses and trying to reduce their debts. They won't rush back to the mall to buy things they don't absolutely need. Employers will be cautious about hiring until they are sure the recovery is robust, so unemployment will remain high for several years.

Public intervention has stabilized the big financial institutions, some of which are making substantial profits. To many this seems unfair, since it was the mistakes of those institutions that caused the crash. Unfair or not, a catastrophic financial meltdown was avoided. We'll have a long slog back to prosperity, but another Great Depression is not going to engulf us all.

DIANE LIM ROGERS

Chief economist of the Concord Coalition; blogger at EconomistMom.com

In a purely technical sense, the latest economic data do suggest that the "worst of the recession" is over. The economy is still shrinking, but not as fast, and most economists think we will bottom out soon. But using aggregate economic data as an indicator of economic "well being" is misleading because such figures are dollar-weighted, not person-weighted: a "rich" family with a $300,000 income is counted nearly 30 times more than a 30-hours-per-week minimum-wage family.

It's those Americans who are assigned the lowest statistical weights who are most likely to be still without a job or otherwise under-employed. The labor market is always the last aggregate piece of the economy to recover, and this recovery is expected to be unusually slow. The irony is that the economy as a whole could be officially "recovering" within a couple months, yet the vast majority of American families will not see an improvement in their own economic well being for at least another year.

On a positive note, the economic data also suggest that when American families eventually land on higher ground, it won't just be back to where they started, but to a different, more sustainable place in terms of their jobs and financial security.

KENNETH ROGOFF

Professor of economics at Harvard University

The economy has clearly moved past the worst of the recession. Any lingering hysteria over a second Great Depression has evaporated. The second half of the year should see some output growth as firms rebuild badly depleted inventories and government stimulus policies start to take full effect. All is on cue with what one sees in the typical post-war recession associated with deep financial crises around the world, as Professor Carmen Reinhart and I have shown in several papers as well as our forthcoming book This Time is Different: Eight Centuries of Financial Folly. Unfortunately, if the U.S. keeps tracking other deep financial crises, employment may not start to significantly improve until the middle of next year, and government debt could end up nearly doubling.

The big question, though, is what kind of recovery to expect over the longer term. Probably the next five to seven years won't be like the boom years before the financial crisis. With housing prices likely to be soft for years, credit much tougher to come by (we hope there will be some regulation!), and unemployment stubbornly high, consumers are likely to remain cautious. At some point soon, too, they will wake up to fact that, one way or the other, the government's tax take is going to have to go up dramatically to pay for soaring national debt and ambitious new social programs.

RUDOLPH G. PENNER

Fellow at the Urban Institute

At the least, the rate of economic decline has slowed. Some measures of economic activity -- such as housing and car sales -- may even be headed upward. But it is unlikely that there will be dancing in the streets. Although economists declare that a recession is over as soon as we pass the bottom, the general public tends to be more subdued. People are likely to remain unhappy until we reach past peaks in economic activity and employment. That will take a very long time: The unemployment rate will probably remain well above 9 percent all the way to the 2010 midterm elections.

That will make congressional Democrats very nervous. Some might call for a second stimulus plan. But I doubt one will pass. The majority's desire to appear proactive will be trumped by worries about an exploding federal debt. Moreover, whatever economists may believe, the public will probably decide that the first stimulus was not very effective.

MARK ZANDI

Chief economist at Moody's Economy.com

The Great Recession is finally giving way to an economic recovery. Driving this turn is the Federal Reserve's unprecedented actions, which have stabilized the financial system, and fiscal stimulus. It's no coincidence that the recession is ending just when the stimulus is providing its maximum economic benefit. Lower payroll taxes, checks to Social Security recipients and help to unemployed workers are buoying household spending. State and local governments have avoided more draconian budget cuts with checks from the feds. The "Cash for Clunkers" program has juiced up vehicle sales, and the housing tax credit has boosted home sales.

But while the economy is making its way back from the abyss, it will not come roaring back. The foreclosure crisis shows no letup, which means that house prices will fall further. Rising vacancy rates and weakening rents mean that hundreds of billions of dollars in commercial mortgage defaults are in the pipeline. And credit remains impaired as banks are anxious and securitization markets are frozen by the prospects of more loan losses and regulatory reform. While it is still premature to say for sure, odds are high that the economy may need another boost from policymakers next year to ensure that the expansion takes full root.


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