History suggests that recoveries from debt-fueled financial bubbles are bound to be slow.
But this time, a recovery is also being hampered by "an extraordinary increase" in policy uncertainty, according to the latest quarterly forecast by economists with the UCLA Anderson Forecast.
"With uncertainty hovering over the economy like a gray cloud, we don’t visualize a return to trend growth to approach 3 percent or so until late 2011," said David Shulman, a senior economist with the UCLA Anderson Forecast.
"In this environment, the unemployment rate will remain extraordinarily high, ending this year at 9.7 percent and 2011 at 9.5 percent."
That’s about where unemployment is now — 9.6 percent was the official rate reported for August.
The UCLA Anderson Forecast anticipates that housing starts, which plummeted from a peak of 2.07 million in 2005 to 554,000 last year, will total only 606,000 this year and 815,000 next year. It will be 2012 before housing starts break through the 1 million mark again, the forecast predicts, when they are expected to reach 1.2 million.
Economic recoveries are usually like relay races, where at some point the baton is passed from government spending to housing and consumer spending, Shulman wrote in a report detailing the outlook for the national economy.
This time, "somewhere along the way the baton was dropped as housing appears to have double-dipped and consumer spending never really took off."
If that’s the case, some economists would argue, there’s still need for another round of government stimulus spending.
But Shulman notes that with concerns about government debt mounting, "stimulus" is something of a dirty word in Washington, D.C., these days.
In any event, it would be difficult for any new stimulus projects Congress might approve to get under way in time to make a difference in the recovery, because of the need to obtain environmental permits, Shulman said.
"There are very few ‘shovel ready’ projects" that Congress could fund, he said.
But if it’s up to the private sector to pick up the baton, Shulman’s report notes that the decisions businesses make about hiring and investing are subject to expectations about future tax, environmental, energy, financial, labor and health care policies.
During the Obama administration’s first two years, Republicans held enough seats in the Senate to thwart some of the Democrats’ most ambitious legislative goals.
Although major bills intended to revamp health care and financial regulatory system were signed into law, there are many unknowns about how they will be implemented. The drafting and adoption of regulations associated with health care and financial regulatory reforms will go on well into 2013, Shulman noted in his report.
With Republicans and tea party activists angling to take back House and Senate seats from Democrats in the November elections, the climate of uncertainty isn’t likely to go away.
"Given the track record of politics, I would have to assume that (the November election) is not going to make it better," Shulman told Inman News. Without expressing a preference for either party’s policies, Shulman said he is "not necessarily a believer that gridlock is good, which is what Wall Street thinks."
Tax policy is one of the few areas where Democrats and Republicans seem to have an opportunity at hand on which they can work out a compromise, Shulman said.
Tax cuts approved by the Bush administration are set to expire this year, which would increase the tax rate on dividends and capital gains from 15 percent to 39.6 percent.
While the Obama administration has proposed a 20 percent capital gains tax as a compromise, Shulman thinks a bipartisan agreement could be achieved by permanently setting it at 15 percent.
In return, Republicans could grant the administration its wish — to set the top rate on ordinary income at 39.6 percent. While the Obama administration wants that rate to apply to any income a married couple earns beyond $250,000, Shulman thinks a compromise would involve setting the threshold at $400,000.
"The Obama administration would get its higher top rate and a step, albeit smaller, toward deficit reduction," Shulman said, and Republicans "would get their low taxes on capital. Above all, the economy would achieve at least a modicum of certainty with respect to tax policy."
A one-year extension of the Bush tax cuts, as some have proposed, would only postpone uncertainty, Shulman said. The worst outcome of all would be to allow all of the Bush tax cuts to lapse, he said.
Much of the government’s efforts to boost the economy have centered around monetary policy — including "quantitative easing" such as the Federal Reserve purchases of $1.25 trillion in mortgage-backed securities, which helped send mortgage rates on their way down to record lows.
At this point, "The Fed has tried practically everything in its policy toolkit to halt the recession and engender recovery," Shulman warned.
"Whether further quantitative easing will work remains to be seen, but to the public it is beginning to look like pushing on the proverbial string," he wrote. "After all, record-low mortgage rates are not triggering a housing boom — far from it."
UCLA Anderson Forecast economists expect the Fed to keep its target for short-term interest rates at zero "for at least another year," and that long-term interest rates "are likely to remain unusually low."
The forecast predicts yields on 10-year U.S. Treasury notes won’t exceed 3 percent on a sustained basis until third-quarter 2011.
That’s slightly more conservative than the latest forecast from Mortgage Bankers Association economists, who anticipate 10-year Treasurys to broach the 3 percent mark in the first quarter of 2011 and hit 3.3 percent by the end of next year.
In a Sept. 10 forecast, MBA economists predicted the spread between 10-year Treasurys and 30-year fixed-rate mortgages will average 1.8 percentage points next year. The MBA forecast calls for rates on 30-year fixed-rate mortgages to climb from an average 4.9 percent during the first quarter of 2011 to 5.7 percent by the third quarter of 2012.
Shulman agreed mortgage rates are headed up, but "we don’t think rates are going to go up enough to torpedo a recovery." For now, joblessness and foreclosures are far bigger issues than mortgage rates, he said.
"We made big mistake," in a previous UCLA Anderson Forecast, Shulman said. "We thought the big problem in housing would be there would be consumer demand, but a lack of financing for construction. Well, the problem has been consumer demand."
That interest rates below 4.5 percent have not stimulated demand "is a shock, and it tells you how broken the housing and labor markets are," Shulman told Inman News.
"In an economy wracked by a post-financial-bubble environment and living in a theme park of policy uncertainty, we forecast very sluggish growth accompanied by high unemployment," he concluded his report.
