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Recovery outlook: growth next year

Modest developments on several fronts have some experts foreseeing expansion in 2010.

By Ron SchererStaff writer / February 25, 2009

Bernanke: The Fed chief says the central bank expects a ‘gradual’ return to growth in the second half of this year and a ‘moderate expansion’ next year.

Joshua Roberts/Reuters

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New York

Finally, there is talk about a resurgence of the US economy.

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The turnaround is not right around the corner. But many economists, including some policymakers, think a change from red to black ink could start to happen by year-end. If things begin clicking, next year could see a return to modest – maybe even close to normal – economic conditions.

“We’re starting to see some prerecovery activity – something you see just before the economy comes hopping back to expansion,” says Gregory Miller, chief economist at SunTrust Banks in Atlanta.

Before congressional panels on Tuesday and Wednesday, Federal Reserve chief Ben Bernanke raised the prospect of better times ahead. He said the Fed expected a “gradual” return to growth in the second half of this year and a “moderate expansion” next year. His testimony was almost like a hint of spring for the financial markets: Investors drove the Dow Jones Industrial Average up 236.16 points Tuesday.

The markets were also encouraged that Mr. Bernanke said he was not in favor of nationalizing the banks, which on Wednesday were undergoing a Fed stress test to see how they would perform in an even more difficult economic environment.

In fact, Bernanke went out of his way to stress that no large bank will be allowed to fail.
Of course, there are some caveats. The downside risks to the economy, Bernanke says, outweigh the upside possibilities. The global nature of the economic downturn could keep US exports on the sidelines. Bernanke also worries about the negative feedback loops, where bad news becomes self-fulfilling. And the financial markets will have to show some stability.

But if financial stability returns, Bernanke says there is a “reasonable” prospect that the current recession will end in 2009 and 2010 will be a year of recovery.

Unfortunately, any recovery might not do much immediately for those who have lost their jobs. Business is often slow to rehire, preferring to add hours to its remaining workforce before hiring new workers. That is partly why Bernanke predicts the unemployment rate by the end of 2010 will still be high – 8 to 8.25 percent, close to its expected peak this year.

Accelerating job losses is one reason that Fred Dickson, chief market strategist at D.A. Davidson & Co., is less sanguine. “We’re not seeing a sign the job losses are leveling off here in the Northwest,” says Mr. Dickson, who is based in Lake Oswego, Ore. “If anything, it’s getting worse.”

Discussing economic growth may seem strange considering the current downturn. A figure for gross domestic product in the fourth quarter of last year will probably be revised lower to show the economy shrank by 5.5 percent instead of 3.8 percent, economists say. This quarter, the economy could lose another 5.5 percent.

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