Popular Economics Weekly

What will economic growth be in 2010? Will it be enough to bring down the unemployment rate, for instance, or bring back the housing market? Does that mean we are really out of the Great Recession? Much of it may depend on how we feel about what has happened.

There is talk of a ‘new normal’ growth rate that will be slower than in recent years. Bill Gross, managing Director of giant bond fund PIMCO, says that a combination of deleveraging debt, re-regulation, and slower foreign growth means slower economic growth for all.

The largest drag will be the need to pay down both public and private debt to more historical levels. That means halving annual government budget deficits from 6 to 3 percent of GDP. That is projected to take 5-10 years—sooner if Congress will reinstate the Pay-as-you-Go rules mandating no additional government spending without the revenues to pay for it. This prevailed during the Clinton Administration that created a budget surplus by 2000.

Household debt is more difficult to determine; but it is rapidly declining, with overall balances back down to 2006 levels and household mortgage and credit card payments as a percentage of disposable household income the lowest since 2001.

The effects of re-regulation are something harder to measure. But if forceful, much confidence will be restored in the financial markets that have caused so much loss. Consumer confidence has stalled since the fall of 2008 when Lehman Brothers and Bear Stearns failed. Housing will also benefit if clearer rules for mortgage lenders are formulated that restores trust in banks. Former Fed Chairman Paul Volcker is leading the charge to take commercial banks out of high-risk investments, for instance.


Behavioral economist Robert Shiller has highlighted the importance of the loss of “hearts and minds” of workers that resulted from the horrendous financial losses incurred by the successive speculative booms. Shiller says “Solutions for the economy must address, not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors—problems that may otherwise persist for many years.”

He is implying that restoring confidence in our financial system is only part of the problem. There is a system-wide malaise from a sense of injustice—that our modern economic system is not egalitarian, particularly today when Wall Street is being rescued by the victims of their greed—U.S. taxpayers.

Major indicators are giving the green light to better growth this year. Firstly, fourth quarter GDP growth surged 5.7 percent after 2.2 percent in Q3. But much of the growth was from replenishing depleted inventories, which is normal during a recovery. Businesses usually over react to downturns by cutting back on shelf-stocking, so have to play catch up when demand picks up.


Two other growth indicators put out by the Institute of Supply Management (ISM) show improving growth as well. The so-called non-manufacturing, service sector has been growing for the past 6 months, after shrinking for 10 months. Its new orders component shot up 2.7 points in January.


The pace of month-to-month growth in the manufacturing sector also rose sharply in January, driven by a red-hot pace of new orders that points to exceptional overall growth through the rest of the first quarter. The ISM’s manufacturing index jumped more than 3 points to 58.4 for its sixth straight indication of month-to-month growth over 50 percent.

Today’s report is very strong and points to a V-recovery for the manufacturing sector, a sector all through the second half of last year that was at the center of economic recovery. It has been rising since December 2008.


In fact, much of the current malaise is due to the high degree of uncertainty about what the future will bring. Start with housing—both the backlog of toxic mortgages weighing down banks, and home foreclosures waiting in the wings. Then we have the uncertainty of jobs growth, which depends in part on less than confident consumers. This uncertainty can only be allayed by a restoration of trust—in both our public and private institutions.

Harlan Green © 2010