Economist Mark Zandi: chance of second recession 1 in 4

Chief economist Mark Zandi is cofounder of Economy.com, a firm that has more than 500 clients worldwide and provides economic research to business, governments, and investors. Mr. Zandi was an adviser to John McCain’s presidential campaign and testifies frequently before Congress. He was interviewed Dec. 2 by telephone.

On the economic outlook for 2010:

Economy.com anticipates “real GDP [gross domestic product] growth of 2 percent in 2010 calendar year and growth of closer to 4 percent in 2011.”

On the unemployment outlook:

“I would be surprised if we don’t get close to 11 percent, primarily because we are at 10 [percent] currently with a falling labor force, which is very unusual. So when those people come back into the workforce, and they will have to as they run out of severance [and] unemployment insurance, then labor force growth will resume and 11 percent unemployment seems very plausible.”

On his concern, mentioned before Congress’s Joint Economic Committee, that firms will be too shellshocked to resume hiring:

“The concern grows with each passing month that we don’t see hiring revive. I do think that, with some of the [government] policy efforts that are likely to take place, we will avoid going back into recession.”

On the likelihood of the US falling back into recession:

“The probability of going back into recession is still low. It is about 1 in 4, 1 in 5. But that is too high, and, more important, if we do go back into recession – if all economists are wrong and we do go back into recession – it will be very painful, it will be very difficult to get out of it. So I think it is very important to guard against that.”

On why it would be especially difficult to get out of a second recession:

“[There are] two reasons. One, there won’t be a good policy response. The [federal funds rate at which the Federal Reserve lends to banks] is at zero and our budget deficit will be ballooning out of control. And second, if we go back into recession, unemployment will surge, and we will probably fall into a deflationary cycle.”

On whether the US is entering a period of “new normal” high unemployment and low growth:

“In the next five years, we will suffer much higher rates of unemployment and slower growth. Even when the economy gets its groove back, it is going to be a number of years – three, five, six years – before we are back to full employment. [That’s] in part because the job market has dug itself such a large hole, and a lot of the jobs that have been lost are permanently lost.... And people are going to have to retool, retrain, look at different markets across the globe, and move. It is just going to take a long time to work that through.”

On whether he favors a direct government hiring program, like the Works Progress Administration in the Great Depression:

“I am skeptical that that is going to work in the near term – near term meaning 2010 – and make a big difference.... If you have a fixed amount of resources, and we do, I am not sure that is the most effective use [of them] in the near term.”