Tracking the recession and ‘U-shaped’ recovery

The formula is simple and the elements are in place for an economic recovery, albeit a slow one, according to Dr. Rebecca Blank, undersecretary of commerce for economic affairs at the U.S. Commerce Department.

Blank, who received her undergraduate degree in economics at the University of Minnesota, came back to the U to deliver a talk entitled “Tracking the U.S. Economic Recovery” as part of the university’s James P. Houck lecture series on applied economics.

Economists have increased their estimates for GDP growth to between 3 and 3.5 percent for 2010, Blank said. Using data from the BEA and the Congressional Budget Office, she went through each element impacting GDP (consumption, government spending, business investment, net imports and employment).

Blank, who oversees the Census Bureau and the Bureau of Economic Analysis within the Department of Commerce, said that most elements of GDP (the total of all goods and services produced) are trending positive, but recovery from the financial crisis-led recession will take longer and “will be more U-shaped” than V-shaped.

Consumers will lead
While some observers have argued that U.S. consumers will be more cautious coming out of the recent recession, Blank believes consumer spending will likely lead the recovery. Predictions of more frugal spending habits do not fit the profile of the American consumer behavior, she observed.

“There is no question,” she said, that recent government intervention lessened the depth of the recession. She credited efforts by the Federal Reserve, under both the Bush and Obama administrations, with stemming the financial panic and setting the stage for economic recovery.

While federal government spending has grown substantially, creating political problems for the administration, it has benefited the economic recovery, Blank said. However, overall government spending has not grown as much as critics argue because falling state and local spending has offset much of the growth in federal spending, she said.

“You can argue how much” of an impact the hundreds of billions of dollars in federal intervention, such as stimulus spending, the bank bailout programs and efforts to keep homeowners in their homes have had, she acknowledged. But the overall impact has been positive, on both GDP and unemployment, she argued. She also pointed out the government “made money” on the bank bailout program.

Business investment was cut back dramatically going into the recession, but with current lingering dormant credit markets, the breadth of the recession and business conservatism, Blank does not expect that component to lead the recovery as it had in the past two recessions.

Productivity gains have been strong over the past four quarters, primarily because employees, worried about their jobs, have been working harder, Blank said.  Employers will have to start hiring back workers as demand continues to pick up, she predicted.

Unemployment percentage rates by gender

Unemployment percentage rates by gender
Source: U.S. Department of Commerce

Employment has started to grow, but the unemployment rate will likely remain high “for four to five years,” Blank said.  A rise in unemployment is “a good sign” for economic recovery, she said, as previously discouraged workers who had dropped out of the count reenter the labor force, optimistic that they can finds jobs.

The current unemployment picture is unusual in several respects. The highest unemployment rate is among workers 16 to 24 years old, she said, pointing out that older workers deferred retirement as they saw their savings shrink in the market meltdown. In addition, unemployment is higher among men than women, primarily because male-dominated sectors of construction and manufacturing have been so hard hit. Correcting for that industry bias, unemployment is virtually identical between the sexes, she said.

As the current economic turmoil in Europe benefits the dollar, net imports are expected to increase, swelling the U.S. trade deficit and putting a drag on the recovery.

Blank’s research has focused on the interaction between the economy, government policy and low-income families.

In answer to a question, she said that welfare reform enacted during the Clinton administration put more single mothers into the workforce. While welfare rolls have not risen, she said “enrollment [in] food stamps has exploded.”

The full impact of the recent recession on the poor has not been fully measured yet as the BEA is just starting to look at data from 2009, she said.

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