Thursday, June 09, 2011

The Economy: When Will Happy Days Be Here Again?

Published: June 08, 2011 in Knowledge@Wharton

The latest economic reports show the U.S. recovery has faltered. But someday, surely, there will be a real recovery. What forces will drive that upturn? And will the healthy economy of the future look different from those of the past -- establishing a "new normal?"

Two intertwined factors are critical to any rebound, according to many experts: Home prices must stop declining and begin to rise, and consumers must spend more freely. In addition, exports must continue to grow and businesses and consumers must feel the government is making significant progress in resolving its deficit problems and clearing away regulatory uncertainty. Government efforts like stimulus spending and keeping interest rates low are not expected to be key factors in a recovery.

Given the many problems afflicting the economy, a vibrant recovery could be years away. The economy grew at an anemic 1.8% annual rate in the first quarter, down from 3.1% in the fourth quarter of 2010. On Tuesday, Federal Reserve chairman Ben Bernanke offered little optimism for the immediate future, calling the recovery "uneven" and acknowledging that it is unlikely that the central bank can solve the economy's woes by itself.

"It's too soon to be talking about a return to a healthy economy; there is a long mid-range period in our future," says Susan M. Wachter, a Wharton real estate professor, adding: "We are three, four, five years away from being back to what might be considered the 'new normal.'" The key obstacle, she notes, is the real estate market -- commercial and residential. "Construction is a job-intensive industry. It's usually the sector, in terms of employment, that leads the job recovery, and that's missing in action this time around. It makes the overall recovery far more vulnerable to other negatives." ...