Page last updated at 12:06 GMT, Thursday, 29 October 2009

Head-to-head: What next for US economy?

US economists John Silvia and Mark Perry
John Silvia (left) debates with fellow economist Mark Perry

Official data has indicated that the US economy has come out of recession, but analysts warn the continuing recovery will be slow.

Here we bring together two US economists with differing views to discuss what is likely to happen next.

John Silvia is chief economist at Wells Fargo in Charlotte, North Carolina. He sees disappointment ahead for US workers and consumers, with a long-term decline in living standards.

Mark Perry is professor of economics at the University of Michigan-Flint and currently visiting economist at the American Enterprise Institute in Washington. He is more optimistic, expecting a resilient economy to produce job growth by late 2010 and deliver low prices for consumers.


Some fear US growth will fall when President Barack Obama's $787bn (£480bn) fiscal stimulus package comes to an end. What about the possibility of a "double-dip" recession, with a return to economic contraction?

John Silvia: I do not see the case for a double-dip or W-shaped recession/recovery.

Historically, the double dip of 1980-82 was driven by a sharp change in monetary policy.

This recovery is being led by federal spending and gradual recovery in consumer spending and business investment. I do not expect the Obama administration to make any drastic turn in fiscal policy.

In addition, low inflation will stay and allow the Fed to maintain low short-term rates, with only a limited decline in the balance sheet.

Mark Perry: I think the recession ended in June and I also see no chance of a double-dip recession. There will be strong growth in the third quarter (3.5% to 4%) and fourth quarter (4% to 5%), with more moderate growth in 2010, about 2.5% to 3%.

Without some kind of policy blunder, which is unlikely, there will be no double-dip.

Most of the fiscal stimulus hits next year, which will help economic growth.

We will have a "jobless recovery" again through 2010, as we did following the 1990-1991 and 2001 recessions. The unemployment rate is set to remain at 9.8% to 10% through mid-2010, gradually coming down below 9.5% by the end of 2010.

There is only a moderate risk of inflation, which should stay below 2% through next year.

Some signs of consumer recovery are already evident. Air travel was up in September and traffic volume has been up for several months in a row.

Strong global recovery in emerging markets such as China, Brazil, India will help to support the US recovery.

John Silvia: Strong growth in the second half of this year will give way to 2.4% growth in 2010, as we see the stimulus waning in the first half of next year. But the jobless recovery will set up both economic and political conflicts.

The jobless recovery suggests disappointing gains in personal income and spending, as many households realise that their standard of living has been diminished.

At the same time, state and local government budget constraints will continue to tighten as income and sales tax revenues remain disappointing.

Again, the jobless recovery and the Fed's caution suggests the weak housing market will continue. Local governments face a two-year-plus period of minimum gains in property tax revenues - and therefore an inability to deliver on local education expectations.

Unemployment and large federal deficits will mean Democratic losses in Congress of 30-plus seats in the House of Representatives and three seats in the Senate in the 2010 mid-term elections.

On top of that, the dollar will continue to decline and America's standard of living will continue to decline relative to other nations.

Mark Perry: I think the dollar's decline will stabilise before it can damage the economy and cause any decline in US standards of living.

The money supply has been flat this year for both M1 and M2, suggesting that the decline in the dollar today results from monetary stimulus in 2008, but that ended almost a year ago.

Since early 2009, the money supply has grown by only 1% to 2%, which will put a bottom on how far the dollar can fall. Also, the strength in foreign currencies relative to the dollar will help boost US exports - and make a positive contribution to real GDP this year and next year.

The global rebound and recovery will also help stimulate US exports and will help the US economy in ways that didn't happen previously. Global strength will help lift the US economy out of recession this year and next year.

Meanwhile, the stock market will continue to rise, because of huge productivity gains from the reduction in labour force, along with continued increases in output in the third and fourth quarters of 2009. Corporate profits will also rise, boosting stocks.

The housing market is coming back, with sales gains even now in places such as Florida and California. With house prices rising, the housing market will continue to improve, construction will pick up next year, and all of this will offset some of the effects of the weak job growth.

Low and stable interest rates moving forward, with low moderate inflation, will help the housing market and keep corporate and consumer borrowing costs low, providing momentum to growth.

John Silvia: I agree on the forward momentum. My issue is that the pace will be disappointing to a society and political class that has made significant promises in health care and education that will not be deliverable with just moderate growth.

Middle-income and low-income families will see their standard of living below their expectations.

There will be growth, yes, but not enough to keep voters happy. Attempts to provide that standard of living depend on protectionism for jobs, dollar depreciation and continued foreign financial support.

Mark Perry: Passing health care legislation, at least the public option part, is looking less and less likely to me, so that issue could be dead by the end of the year.

With falling prices for just about everything (clothing, food, air travel, housing, cell phone service, prescription drugs etc and historically low interest rates for home and car purchases), there has never been a better time to be a consumer in America, and that will offset some of the income losses. Also, job growth by end of 2010 will help boost confidence and incomes.

The US economy is resilient, and that goes for workers, consumers and companies. A strong economic recovery might surprise everybody.

Emerging from a deep recession will make the economy leaner, more productive and stronger, offsetting the headwinds mentioned by John.



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