Kathlen Madigan, who writes The Big Picture column for Dow Jones Newswires, is the one who unearthed this tidbit in the summary of the FOMC minutes: that the Fed thinks it’ll be five or six years before the economy is back to “normal.” That’s five or six years of low (practically non-existent) interest rates, five or six years of slack labor markets (and likely wages as well, supply and demand don’tcha know,) five or six years of lumpy, uneven economic growth, some quarters good, some quarters bad.
Think anybody’s really factored that into their models? Maybe David Rosenberg and John Hussman, but not too many others. Whether or not the economy is technically in a recession — and remember, its end has not been officially declared, won’t matter if the economy is so weak people can’t find good jobs that pay livable wages, unless we are prepared to accept a pretty massive downgrade in our living standards.
From Madigan’s column:
Five or six years. That’s how long Federal Reserve officials expect it will take to get the economy back to where it was before subprime mortgages, Bernie Madoff and TARP entered into our daily conversations.
What’s worse is that five or six years might be optimistic, with unsettling implications for the medium-run outlook.
According to the minutes of the June 22-23 Federal Open Market Committee meeting, officials thought it would take “some time” for the economy to return to the rates of output growth, unemployment, and inflation consistent with the Fed’s policy goal. “Most expected the convergence process to take no more than five to six years,” the minutes said.
Whoa. With the recovery probably one year old, the implication is the economy won’t return to “normal” until 2014 or 2015. It’s an indication of how deep a hole we dug ourselves into: the Congressional Budget Office estimates the economy was functioning 5.8% below its potential in the first quarter.
The CBO also forecasts potential real gross domestic product–a measure of the economy’s optimal growth rate adjusted for inflation–should expand to $15.8 trillion by 2015, from the current $13.2 trillion. To reach that, the economy has to grow almost 4% each year for the next five years.
That’s not impossible, but it’s rather optimistic; it seems like we haven’t averaged anything like that for a long time. Also, as Madigan points out, it’ll be even harder to achieve if the government is reining in spending rather than letting it out. The average lately has been closer to 3%, and with a weak economy even that will be a challenge.
Raymond Haines
July 19, 2010
Paul, there is much I could add into this. Are we going to suffer the same consequences that Japan has suffered through ? That means rates stay low for a very very long time. I would like to believe the American economy is more dynamic then Japan, where exports are the main driver not consumption, but clearly Americans are being cautious on consumption. What makes this recovery very different from past ones is the scarcity of credit. Small businesses, the main employers of Americans cannot access credit, leaving them no wiggle room to run and expand their business. If the banks do not want to lend, but just ride the yield curve to repair their balance sheets, then perhaps we need some form of a quasi government agency to get credit going again. I’ll say here once again, the middle-class in America is in jeopardy unless government comes up with the right policy mix. Also keep in mind that if this malaise last 10 years, it will roll right into the retirement time of the entitlement generation.