Economy limping back to strength
'SLOW-MOTION RECOVERY'
Fed: Return to normal may take 5 or 6 years

By Neil Irwin and Renae Merle
Washington Post Staff Writer
Wednesday, November 25, 2009

The unemployment rate will remain elevated for years to come, accordingto a forecast released Tuesday by the Federal Reserve that addressesfor the first time economic conditions at the time of the nextpresidential election.

It paints a grim picture. Top Fed officials expect the unemploymentrate to remain in the 6.8 to 7.5 percent range at the end of 2012 andsaid it could take "about five or six years" from now for economicactivity to return to normal. The jobless rate was 10.2 percent inOctober.

That sober forecast came on top of a revised government estimatealso released Tuesday of economic output in the third quarter showingthat the recovery got off to a slower start over the summer thanpreviously thought.

Government efforts to prop up the economy -- including the $787billion stimulus package passed in February, the "Cash for Clunkers"program to support auto sales this summer, and a zero interest ratepolicy by the Federal Reserve -- are helping. The contribution ofgovernment spending to gross domestic product in the third quarter wasactually higher than originally reported, the Commerce Department said.

But so far, the impact of these efforts has not been enough to engender a strong rebound.

"It is a slow-motion recovery," said Stuart Hoffman, chief economist at PNC Financial Services Group. "It sure doesn't look like the beginning of a normal, rapid recovery."

The math is simple: The U.S. economy is capable of growing atroughly 2.5 to 3 percent a year, thanks to population growth andtechnological improvement, and needs to grow faster than that to createlarge numbers of jobs and significantly improved standards of living.

Following the last recession of comparable depth for example, in1981-82, gross domestic product growth averaged a 7.8 percent annualrate for four quarters.

In this recession, by contrast, the five current Fed governors and12 presidents of regional Fed banks expect growth of 2.5 to 3.5 percentin 2010 -- which would be enough to bring the unemployment rate downonly slightly.

"Business contacts reported that they would be cautious in theirhiring and would continue to aggressively seek cost savings," saidminutes of the Fed policymaking meeting earlier this month, which werereleased alongside the forecast. The officials "expected thatbusinesses would be able to meet any increases in demand in the nearterm by raising their employees' hours and boosting productivity, thusdelaying the need to add to their payrolls."

The minutes even raised the prospect that this could be a joblessrecovery, with slow hiring for some time, as was the case during thepast two recessions. The Fed leaders "discussed" that possibility. Butthey were slightly more optimistic than before, upgrading theirprojections for the economic growth and employment in 2010 and 2011from the levels envisioned in June.

The officials also discussed -- and apparently dismissed -- the riskthat their ultra-low interest rate policy is stoking bubbles in themarkets, artificially inflating the value of stocks, gold and otherassets. "While members currently saw the likelihood of such effects asrelatively low, they would remain alert to these risks," the minutessaid.

The Fed minutes weren't the only report Tuesday to serve as areminder of the softness of the recovery so far. GDP, a broad measureof economic output, rose at a 2.8 percent annual rate in theJuly-to-September period, the Commerce Department said, compared withthe 3.5 percent growth rate first reported. The agency re-calculatesthe data as more complete information becomes available.

"It's hard for me to get excited over 2.8 percent growth at thisstage of a recovery," said Sung Won Sohn, an economist at CaliforniaState University Channel Islands. "Historically at an early stage of arecovery, we should be growing at 4 to 5 percent, just to pick up theslack. We should be experiencing a rubber-band effect, snapping back,but we're not."

Economists say they think the economy has continued growing in thefourth quarter, though still at a measured pace -- an annual rate inthe 3 percent range. Employment frequently lags overall output at theend of a recession, as skittish employers ramp up production usingexisting workers rather than hiring, unsure whether rising demand willlast.

The Commerce report showed that personal consumption expendituresrose at a 2.9 percent rate in the third quarter, not the 3.4 percentgrowth originally reported, with a particularly steep reduction in thegrowth in purchases of durable goods, such as automobiles.

Activity in both commercial and residential real estate was worsethan previously thought, and imports were higher. In one positiverevision, government spending and investment rose at a 3.1 percentannual rate, not the 2.5 percent originally estimated.

Meanwhile, the housing sector continues a bumpy recovery, accordingto recent data. Housing starts stumbled more than expected last month,but existing-home sales surged more than 10 percent, according to datareleased Monday. It was buoyed by first-time buyers rushing to cash inon an $8,000 tax credit initially set to expire this month. Congresshas since extended and expanded the tax credit to more buyers.

But many economists doubt whether the sales gains in October aresustainable, particularly if unemployment continues to rise andgovernment policies, such as Fed purchases of mortgage related debt andhomebuyer tax breaks, are curtailed.

Also, U.S. home prices rose are continuing to improve, according tothe Standard & Poor's/Case-Shiller home price index data releasedTuesday, but still lumber around 2003 levels.

In 20 major metropolitan areas measured by the index, home pricesrose 0.3 percent in September from the previous month, its fifthconsecutive monthly increase. Prices were down 9.4 percent comparedwith the same month last year. Prices rose for the sixth consecutivemonth in the Washington region. They were up 0.8 percent on aseasonally adjusted basis, according to the index.

The increase was modest and fewer cities saw an improvement. "Whileclearly September was a positive month . . . it didn't feel quite as arobust as some of the summer months did," said David Blitzer, chairmanof the S&P's index committee.