America is at a crossroads in a shifting global economy, and it’s not just our economy that is in trouble. We have moved from a mindset of prosperity to a much gloomier self-conception, and dysfunctions within our government and society are pushing us downward.
That sobering assessment was delivered by Allen Sinai, the president of Decision Economics, an economic research firm he founded in 1996. Sinai has advised both Republican and Democratic administrations, including the current one. He spoke on Sunday in Lexington, MA.
Sinai said that we can still count ourselves among the “haves” on an absolute scale worldwide, but on an emotional scale we are now a “have not.” “If you look at growth, unemployment, the deficit, our current account, or at the way movements such as the Tea Party are tearing society apart,” he said, “it is apparent we are a society going through a crisis.”
Sinai did have an optimistic forecast for US equity markets, but let’s start with his assessment of the likely path of our economic recovery.
An “L” with an up-tilt
“We are one and a half years into the official recovery,” Sinai said, “but it doesn’t feel that way to the bulk of Americans, and that’s really what counts.” Sinai said that the unemployment rate would remain at 9% or above through 2011 and would decline only to 8.5% by the end of 2012.
Sinai noted that GDP growth was only 3% in the first year of the recovery, which was less than half the average of all previous post-War recoveries. “Given the depth of the recession,” he said, “that was really terrible.”
Terrible was a word he seemed to chose carefully, and Sinai backed it up with data. He pointed, for example, to the $50 trillion peak-to-trough decline in household net worth (of which a mere $3 trillion has been since recovered) and “anemic” growth in real disposable income of 1%.
Our economic recovery will take the shape of the letter “L” with an up-tilt, Sinai said, meaning that growth will be slow and uneven going forward – approximately 2% to 2.5%. He said a W-shaped recovery – implying a double-dip recession – would happen if Congress allowed all the Bush tax cuts to expire, which he expects has a 15% chance of occurring.
A V-shaped recovery, with strong economic growth has approximately a 5% chance of occurring, Sinai predicted, but he did not say under what conditions that outcome might emerge.
At the other extreme, Sinai assigned a probability of 10% to 15% to a Japan-like stagnation.
Underlying Sinai’s forecast is his characterization of the “new normal,” which he defined by consumer growth at half its pace from the 40 years prior to the crisis. “Consumers will be spending less and saving more for far longer than at any time in my professional career,” he said.
“History tells us it takes a decade to heal,” he said, “to get back to where we were.”
