Once the great recession ends, don’t break out the party hats. What follows it could be a period of growth so weak that the average American’s standard of living may not reach its 2007 level for years.
Americans will have “to live a little differently,” says Harald Malmgren, a Washington economic consultant. He forecasts that the United States economy will not bounce back to the 3 or 4 percent average real annual growth rate for gross domestic product (GDP – the output of goods and services) that has prevailed for several decades. Rather he sees “sluggish growth” for not just a year or two, but possibly decades. That means consumers’ discretionary purchases are going to be “pretty limited,” he adds.
Every downturn has its share of doom-sayers. But even a cheerier economist, Nariman Behravesh, of IHS Global Insight in Lexington, Mass., doesn’t dismiss the idea of a lower US standard of living. He forecasts a modest GDP growth rate of 2.5 to 3 percent a year, not enough to bring down unemployment to a reasonable rate soon.
The concern that these economists share is that confidence-shaken Americans have switched from a habit of spending like crazy to saving like crazy. So domestic consumption will not give the economy a big surge of growth in the near future.
Today’s “savings spree,” says Mr. Shilling, could result in the household-savings rate gradually reaching 10 percent in 10 years, after being flat or negative in recent boom years. In April and May, consumers tucked away most of the dollars they got from the Obama stimulus package.
Many didn’t spend the Social Security bonus or the tax cuts. That pushed up the US savings rate in May to 6.9 percent.
Similarly, the financial sector is deleveraging and won’t be lending for another housing boom anytime soon, he says.
In the long run, the US benefits if Americans save and invest more. Families will be in a better financial position, and the nation will be able to reduce its dependence on foreign lenders to finance its own growth. But in the short term, a cutback in consumer spending slows growth.
Mr. Behravesh hopes growth in exports will offset that weakness and provide “decent growth.” In May, exports did rise, shrinking the deficit nicely.
Such export growth, he cautions, will need both the cooperation of importing nations and a “bounce back” in the world’s growth rate.
Downward pressure on the value of the US dollar – not a big drop but a gradual easing – would also help. It would make US exports cheaper to buy abroad and imports more expensive at home, perhaps causing consumers to think twice before buying a foreign-made good.
But Mr. Malmgren, who began warning about America’s “period of excess” back in 2005, sees a larger, gloomier picture. He calls it “global cooling.”
Most European economies are in even worse shape than the American economy and much more reliant on exports than the US, he says. They face a deeper recession than the US, so they’re less likely to soak up a lot more exports.
For years, the US has lived 5 to 6 percent beyond its means, experiencing a large trade deficit, that is, imports exceeding exports. If Americans are now in the process of reversing course, the adjustment could take years.
In the meantime, the US standard of living will take a hit.