Could the U.S. experience a strong economic recovery?

By Money Matters Editors

Can one make the case that the U.S. economic recovery will be stronger than expected? Hey, it’s a dirty job, but somebody has to do it.

Here’s why the U.S. economy might register stronger GDP growth in the initial stage of the recovery:

First, there’s the manufacturing sector. The Institute for Supply Management’s manufacturing index rose to 52.9 in August from 48.9 in July. Readings above 50 indicate an economic expansion; under 50, a contraction, but the important point is that businesses have cut inventories for 40 straight months.

The significance? Companies and manufacturers have become super-lean: along with cutting costs, they’ve been unwilling to store products, for fear of being left with goods they can’t sell, in the event the longest U.S. recession since the end of World War II continues through the fall and into winter. However, those super-lean inventories mean many corporations will be ‘product-short’ if the economic recovery takes hold, requiring them to hire to increase production and rebuild inventories. If that occurs, U.S. GDP will benefit from the increased purchasing poer and additional commerce.


Second, GDP growth in emerging market giants China and India has already accelerated quicker than many economists had forecast. If demand in the east, along with Latin American and Europe demand, is sustained, that would boost global trade, and the U.S. economy would receive a modest tailwind.

Third, fiscal stimulus money will continue to work its way into the U.S. economy, including money for infrastructure projects, and aid to state social services. Only about 30-35 percent of the fiscal stimulus package has been targeted for 2009 – hence, expect a decent-sized tailwind from federal spending in 2010.

Finally, there’s the impact of the pronounced recession itself. Historically, every time the United States experienced a deep recession in the modern era, 1953-54, 1957-58, 1973-75, and 1981-1982, U.S. GDP increased at better than 6 percent during the recovery’s first year. Following the Great Depression's initial period, 1929-33, the economy snapped-back with 10.8 percent growth (although it slumped again in 1937 before recovery following the start of World War II in 1941). Hence, if the historical norm of severe recession/stronger recovery holds, U.S. GDP growth should be better than adequate in the recovery’s initial stage.

Only modest GDP growth seen for 2010

So why then, given the above (lean inventories, emerging market growth, fiscal stimulus, historical precedent) do most economic forecasts expect only sluggish-to-moderate GDP growth as the recovery takes hold?

The major reason is concern about U.S. consumer spending. Americans have increased their saving rate to about 5 percent, while simultaneously cutting back their spending. If the ‘frugal consumer’ era continues, it’s highly unlikely that consumer spending will account for 60-65 percent of U.S. GDP that it has historically. For the above reason, a sustained consumer pull-back almost guarantees lower U.S. GDP growth. Put another way, a high GDP growth economy is dependent on high levels of consumption. Take a portion of that spending away, and there’s less commerce to go around at the retail end.

Over time, the U.S. economy can adjust to one in which the consumer does not account for as much of GDP as is it has historically. It can become a more ‘quality-of-life’ oriented economy, but there will be distinct sector losers (including the retail, restaurant, and apparel sectors), with considerable dislocation. And it’s that dislocation, and its impact on future job growth that has led many economists to expect a weak economic recovery as it pulls out of the current recession.