Slow U.S. Economic Growth Expected - Consumer Justice Foundation

Slow U.S. Economic Growth Expected

Written by Andrew Sarski on August 26, 2011
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Slow Economic Growth Expected in Coming Years

According to a recent Associated Press survey of economists, the likelihood of the U.S. facing another recession, or another two or more consecutive quarters of economic contraction, before August 2012 is only 26%. Unfortunately, the survey also determined that the economy is expected to proceed at only 2.1% growth for the rest of the year, barely doing better in 2012. The Federal Reserve, the central banking system of the United States, has taken a similar view, announcing earlier this month that it would keep interest rates near zero for at least the next two years, expecting a “somewhat slower pace of recovery over coming quarters” than it had previously predicted. Similarly, J.P. Morgan, Goldman Sachs, and Morgan Stanley all cut their growth forecasts last week, with J.P. Morgan predicting just 1% growth for the fourth quarter of the year, even lower than the 1.3% growth reported during the second quarter.

Adverse Effects of Possible Economic Stagnation

Bernstein argues that focusing narrowly on whether the economy is growing or shrinking is damaging; he believes we should instead look at whether the economy is meeting its potential growth rate, which is 2.4%. By that standard, the U.S. has been in what Bernstein calls a “growth recession,” a period in which the economy is expanding but not enough to exceed its potential, since mid-2010. Unfortunately, this period of extremely low growth isn’t expected to change any time soon. According to some economists, the negative impact of an economic shock like the bursting of the housing bubble typically affects the economy and job growth for about a decade. “Income growth tends to slow and unemployment remains elevated for a very long time after a severe shock,” report economists Carmen and Vincent Reinhart, leading to a “lengthy period of retrenchment.”

Unfortunately, long-term trends may be in effect as well. According to George Mason University economics professor Tyler Cowen, developed economies worldwide are experiencing a sort of stagnation, due to the decreased pace of innovation. According to Cowen, the next wave of advances, including the Internet, aren’t employing as many people as those large-scale developments that came previously, like electricity, mass education and penicillin. This prolonged period of stagnation, according to economics professor at the University of Oregon Mark Thoma, would be accompanied by an increase in long-term joblessness, which would likely lead to older people dropping out of the labor force entirely, after spending an extended amount of time looking unsuccessfully for work. Other workers, especially in dynamic industries like technology, would likely see their skills erode over time, making it even harder for them to find work. In the end, Thoma predicts, “the longer the recovery drags on, the more permanent the damage.”

Posted Under: United States
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