Economists See Long Road to Recovery

By PHIL IZZO

Economists in the latest Wall Street Journal survey see an end to the recession by autumn, but say it will take years for the economy to fully recover.

"In general, I think it will be a subdued recovery," said Paul Kasriel of The Northern Trust Corp.

On average, the 52 economists who participated in the survey project that the recession will end in August. They expect gross domestic product to contract 1.4% at a seasonally adjusted annualized pace in the current quarter, compared with the 6.1% drop recorded in the first quarter. Slow growth is expected to return by the third quarter, with the economy expanding more than 2% in the first half of 2010.

The survey was conducted before the Commerce Department's report this week that retail sales fell 0.4% in April from the previous month, which left some economists questioning whether consumer spending is ready to rebound. Initial unemployment claims released Thursday brought more gloomy news: Seasonally adjusted claims in the week ended May 9 increased 32,000 to 637,000 from a revised 605,000 in the preceding week. Most of the losses can be chalked up to Chrysler LLC's 27,000 layoffs following its April 30 bankruptcy filing.

Separately, the April producer price index, which gauges prices at the wholesale level, rose 0.3%, driven by growth in food prices. The core price index, which excludes food and energy, was up 0.1%.

Even before the new data were released, economists were expecting a major pullback in consumption. Nearly three-quarters of survey respondents said the recent increase in the U.S. saving rate is the beginning of a major behavioral shift.

"Savings rates will remain above pre-bubble levels," said Scott Anderson of Wells Fargo & Co.

A consumer retrenchment is one factor that is likely to make any recovery a long slog. The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months, even as growth returns to the economy.

The depth of the downturn means it will take years to eat up the slack created by the recession. To gain back ground lost and bring down unemployment, the economy has to grow by more than its potential rate. Nearly half of the economists said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years.

"We're going through a transition in the economy back to a more normal share of consumer spending relative to GDP," said Paul Kasriel of The Northern Trust Corp. "This is a very deep and defining recession that is going to lead to a transformed U.S. economy, and these transformations don't take place overnight."

The survey respondents were more positive about the financial sector. A third of the economists said the recently completed bank stress tests were a well-done and very constructive process, while half said they were helpful even if they understated risks. Last week, the Federal Reserve and Treasury Department released the results of tests to gauge how well banks' balance sheets would withstand the recession. The tests found that even though some banks may need more capital, all the top institutions were solvent. Meanwhile, more than three-quarters said President Barack Obama's administration won't have to go back to Congress for more money to aid banks.

"The best things about the stress tests was the timing of the release," said Lou Crandall of Wrightson ICAP. "The tests kept everything in limbo for a while, getting past the hurdle of recapitalization just as the data started to suggest the approach of a floor. That makes this a good time for the banking system to start the next phase of cleaning up the balance sheet.

Half the respondents said that fiscal and monetary stimulus has provided the basis for a sustainable recovery. Twenty-seven percent said it has boosted the economy, but they had doubts about sustainability. "The Fed has the big guns and has effectively averted a depression or a much more severe recession," said Diane Swonk of Mesirow Financial.

The role of the Fed in stabilizing the market has boosted the outlook for Chairman Ben Bernanke. On average, the economists say there is a 72% chance that Mr. Obama will reappoint the Fed chairman in 2010. "If there's a hero to this piece, it's Ben Bernanke," Mr. Kasriel said.