Don’t Expect Economic Recovery in 2009

Three leading economic experts spoke out this week about when they expect economic recovery.

Martin Feldstein, President emeritus of the National Bureau of Economic Research, says the economy is headed for a “very long and damaging economic downturn” that will not see any recovery in 2009.

“We’ve got a long way to go before this [economy] turns around,” he told CNBC and said this recession is “worse than anything we’ve seen since the 1930s.”

He believes the Federal Reserve’s recent efforts to stimulate the economy will not be effective in the long run because they are not targeting the real problem that is causing the downturn, which he says is dysfunction in the credit markets.

Richard Fisher Dallas Federal Reserve Bank President also believes the U.S. economy will get worse before it gets better in 2010.

“Obviously we’re under duress right now. I expect a gradual lifting of performance, getting less bad as we go through the year, but still I expect negative growth for this year, and improvement for the subsequent year,” he said. “I think that the first quarter of 2009 was equally bad or maybe slightly worse than the fourth quarter of 2008. There’s little confidence in the economy right now,” said Fisher. “We won’t get into positive growth until 2010.”

Unlike Feldstein, Fisher thinks the U.S. has been ‘ahead of the curve’ in its approach to helping the economy rebound, citing the fact that other central banks around the world are following the Federal Reserve’s lead.

“The global nature of the current downturn has prevented some of the vast U.S. monetary and fiscal stimulus from taking hold so far”, Fisher said. “We’ve certainly been ahead of the curve, and you see other central banks now follow us. But the global economic situation has imploded … I think there’s an overall bad mood in terms of the world at large,” he said. “There’s an enormous amount of stimulus in the economy, but there’s just deep concern. There’s a lot of fog out there, and they don’t know if it leads into a box canyon or to a new bridge in the sunlight. And time will tell.”

Fisher said about protectionism:

“It’s the crack cocaine of economies. I understand the need to protect your own, but it should be avoided.”

Bill Gross is a bond expert and head of the Pimco bond fund. He doesn’t expect the market to rally anytime soon.

“Investors looking for double-digit returns from their holdings are going to have to learn to live in a different world for the next several years,” he said.

According to Gross, significant gains in stocks and real estate won’t return on a broad basis until the recession ends.

“To the extent that investors previously thought that double-digit returns were there for the taking, were there for the having, in the forms of stocks for the long run or housing prices going up at double-digit rates, those asset classes will not show that type of appreciation,” he said. “So bonds at stable incomes of 4 to 6 percent are an attractive situation.”

Gross believes Treasury Inflation-Protected Securities, or TIPS, are a good investment for people looking for protection against rising cost of living.

Like Fisher, he thinks government spending is necessary to stabilize the economy.

“We need all of the programs that the government has basically put forward,” Gross said. “We need trillions of dollars despite the fact that the budget deficits will be in the trillions. And we need them for at least several years in order to get that 4 to 5 percent growth rate that’s required.”

I think it’s interesting that although they all agree about when we’ll start to rebound, none of them really line up on the how or why of it all.

Image Credit: artemuestra, Flickr