By HARRY M. DAVIS, special to LTW
Editor’s note: Dr. Harry Davis, an economist and professor of banking at Appalachian State University, is the economist for the
RALEIGH, N.C. – By any measure, this recession has been the most severe since the Great Depression. Over 8.5 million people have lost their jobs and another 8-10 million have stopped looking for work. Over 40 percent of the unemployed have been so for at least 26 weeks.
It took 23 and 39 months respectively after the 1991 and 2001 recessions to regain the jobs lost in each recession. Most economists, including this one, believe it will take at least 60 months to create the jobs lost in this recession.
The recovery will be different than those in recent memory. GDP growth has often been in the 4-6% percent range for several quarters on an annualized basis after recent recessions. This time the rate of GDP growth will be much slower as the economy tends to bounce along the bottom.
Large debt levels of households and the federal government make strong economic growth less likely after each recession. Expect the economy to grow about 3-3.25 percent this year and slightly faster next year. Unfortunately, a rate of growth above 3.5 percent is needed to reduce the unemployment rate significantly.
Consumer confidence has been increasing for several months but plunged in February. Even before the February number, the level of confidence was considerably below the level at the end of the 2001 recession. As a result, consumers are less likely to increase spending as they have in the past.
Consumer’s attitudes are very important since consumer spending accounts for 72 percent of GDP. Consumers are spending less and saving more in an attempt to reduce debt. Indeed, household debt fell 1.7 percent last year which is the largest drop since 1945.
The housing sector continues to take its lumps. New home sales hit record lows in both January and February while existing home sales declined for the third consecutive month in February. The inventory of unsold existing homes had been falling for the last two years until February.
The tax credit for home buyers runs out at the end of April and the Federal Reserve has announced it will stop buying mortgage securities at the end of March which may lead to higher mortgage interest rates. Between potentially higher interest rates and persistent high unemployment, housing will recover very slowly.
The state economy has been severely hurt by the slowdown in world trade. The state unemployment rate in January was 11.1 percent which was the eighth highest in the nation. State tax revenues will fail to meet projections this year leading to budget cuts.
The private sector has taken most of the brunt of the recession so far. Now the public sector will be hit very hard as tax revenues fail to meet projections. State, county, and local governments across this state and the nation will suffer and have to make significant budget cuts.
Many such entities increased spending at rapid rates during the high economic growth years of 2002-2007. Now they will have to bring expenditures into line with much slower revenue growth for the foreseeable future.
Editor’s note: For other economists’ views published in LTW,
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