In the Long Run, We'll Be Fine

11/17/2010 1:00 pm EST


Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and

Knight Kiplinger, editor-in-chief of the Kiplinger Letter, forecasts a gradual recovery despite the prospect of high unemployment for years to come.    

In terms of the economy, the past decade was lost—almost no growth by a wide variety of measures.

Stock values rose, but then plunged, ending the period virtually flat. Americans’ median income, adjusted for inflation, is $49,777, 5% lower than it was ten years ago. Real gross domestic product gained a mere 20% from 2000 to 2009. Total employment was essentially unchanged from the beginning [to the end] of the decade.

The next decade won’t be nearly as dismal.

The pace of GDP gains will accelerate from the recent annualized growth rate of 2%, as slowing productivity gains require employers to add to payrolls, unleashing pent-up demand. But it’s unlikely to match earlier decades: the 3.2% average annual growth of the 1970s and 1990s, the 3% of the 1980s, or the over-4% average of the 1960s.

Consumers will provide a bit less oomph. Leading up to the recession, inflated home values and easy credit artificially pumped up demand for consumer goods, from apparel to flat-panel TVs. By 2002, consumer spending had risen from 66% of the economy, its typical share for decades, to a 70% share. Although demand will climb as the recession fades further into the past, the more normal pattern will prevail: no extra bit of juice.

And congressional efforts to tame the federal deficit will dampen gains as government spending on roads, schools, etc., is reined in and taxes increase.

Also a factor: The end of rock-bottom interest rates as the economy starts to pick up steam and the Federal Reserve tightens rates to curb inflation.

For the next five years or so, [expect] average annual growth of about 2.75%, with the pace possibly picking up a bit more in the second half of the decade. By the end of the decade, [we should see] recovery to some peaks hit before the recession.

Within a few years, median household income will rebound—[stock indexes, some time later]. And near the end of the decade [will come a] recovery of the 8.4 million jobs lost. But unemployment won’t reach its pre-recession level until after 2020. Nor will annual housing starts, average home prices, or motor vehicle sales.

Still, it’s a mistake to be gloomy. Americans won’t lose their appetite for homes, cars, and new electronic gizmos. They’ll pare back, but not dramatically. More exports may help. The US gets only about 12% of its GDP from sales to other countries, compared with 50% for Germany and about 30% for the UK.

And don’t discount American innovation and entrepreneurship.

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