Downturn is not the ‘new normal’

Job losses, tight lending standards and miserly consumer spending aren’t the "new normal" and the U.S. isn’t headed for a "lost decade," economists with the UCLA Anderson Forecast said in a report released today.

But the economy will grow slowly next year and unemployment will remain high, despite promising signs that housing is "finally on the road to recovery," the report said.

Foreclosures continue to rise, and the report estimates that 23 percent of homes with a mortgage are underwater — meaning their owners owe more than their homes are worth. But low mortgage rates and pent-up demand are expected to boost housing starts by 48 percent next year, to 850,000 units.

"If we looked only at housing, we might be thinking a powerful recovery is just around the corner," said Edward Leamer, director of the UCLA Anderson Forecast, in an essay accompanying the fourth-quarter report,"The Shape of Recoveries Past and the Shape of Recoveries Present."

The housing boom built up an excessive stock of housing, but under-building since 2007 seems to have created enough pent-up demand "to fuel a powerful recovery," Leamer said.

The picture is complicated by the fact that housing constitutes only one segment of the economy, and consumer spending — which traditionally drives recoveries — will remain hobbled by unemployment and household debt.

Economists with the UCLA Anderson Forecast project consumer spending will grow at an annual rate of 2 percent, well below the more historical 3 percent to 3.5 percent rate. Unemployment in the U.S. should peak at 10.5 percent in the first quarter of 2010, and remain above 10 percent for the rest of the year.

The U.S. economy is in transition, from one based largely on the consumption of cheap imported goods and a low savings rate, to a system with a greater emphasis on exports and increased household saving, said David Shulman, senior economist with the UCLA Anderson Forecast, in an essay, "Lost and Found."

The Obama administration is encouraging this transition by keeping the dollar weak, which encourages exports and discourages the consumption of imports, Shulman said.

Record federal deficits and the Federal Reserve’s zero-interest-rate policy have created a "highly medicated economy," which consumers and businesses are taking advantage of to refinance high-cost debt. …CONTINUED