Recently the National Bureau of Economic Research (NBER) surprised many Americans by announcing the end of the U.S. recession. By definition this occurred when the growth in GDP began in Q3 of 2009 and continued into 2010. President Reagan defined a recession as when your neighbor loses his job and a depression when you lose yours. Financial guru Warren Buffet took a different view than the NBER, saying that if “the average American (or his family) is below where he was before, in terms of real income, GDP” we are still in a recession. Most Americans would probably agree with Mr. Buffet.
Let’s look at economic forecasts for U.S. GDP growth. The U.S. grew at an anemic 1.6 percent in Q2. Bank of America and Goldman Sachs are both forecasting only 1.8 percent growth next year, we need around 2.1 to 2.3 percent to create job growth and reduce unemployment. BofA forecasts higher unemployment in 2011 of 10.1 percent. One reason (perhaps the most important) the American unemployment dropped from 10.1 percent in October 2009 to 9.6 percent in August 2010 is 1.2 million people who were unable to find jobs stopped looking for work. Those not actively looking for jobs are not counted in the unemployment rate. I might point out that most economists are forecasting higher GDP rates next year, but somewhat less than 2010. It is easy to see that as long as housing prices struggle to stay flat (or if you believe studies that show them rising, that they will continue to do so) and job growth poor, there can be no real sustainable recovery. I have seen interesting math showing that increasing income tax rates now can actually exacerbate the risks that the recovery will stall or take longer because it will automatically reduce GDP—clearly this is the case for higher proposed capital gains tax rates.
So what’s on the horizon? Lots of uncertainty, especially about what the government can do and what impact, if any, tax increases and further stimulus will have on the economy. On the bright side, it’s a great time to borrow money to purchase assets as rates are near all-time lows, assuming you can get your bank to make the loan!