Thursday, October 29, 2009

Goldman, J.P. Morgan Economists Debate Shape of Recovery

From the Wall Street Journal's Real Time Economics blog:

The recession might be over, but how goes the recovery?

We posed that question to two prominent Wall Street economists with two very different views of 2010. Bruce Kasman, chief economist at J.P. Morgan, sees the U.S. growing at about a 3.5% pace for most of next year. That appears optimistic compared to Jan Hatzius, chief economist at Goldman Sachs, who sees gross domestic product growth of 2% or so at the start of the year tapering off to just 1.5% by year-end.

The following is an edited transcript of their remarks during a recent conference call with The Wall Street Journal.

Looking ahead to 2010, what kind of recovery do you see?

Kasman: We’re going to get more growth than people expect, but a lot less than we need. The power of a business cycle, once policymakers are committed to supporting growth and once activity levels get down so low that even modest changes in behavior start to give us a lift, should not be underestimated. Deep recessions have been followed by strong growth [because] those dynamics start to gather some steam. At the same time, even if we’re talking 3.5% to 4% growth, that’s not going to put us in a position 18 or 36 months from now to feel as if we have a labor market that will look anything like it used to over the last 20 years – I think that would take sustained growth in the 5-6% range for three or four years, which we did deliver coming out of the mid-70s and early-80s recessions, so it has been done.

Hatzius: I think we’re going to lose a lot of short-term stimuli and the headwinds to a stronger pickup in underlying demand are, I think, pretty formidable and much more formidable than what you saw, for example, in the mid-1970s or early ‘80s when you had a lot more pent-up demand. I think it’s just a very different business cycle and extrapolating from the history of the ‘70s and early ‘80s I don’t find that promising on the forecasting front.

Kasman: What is similar, I think, in this cycle that has been consistent across cycles is that we get to a point in which the adjustments in housing, in manufacturing, in the retail sector become very sharp and with a little bit of help from policy and an improvement in financial market conditions that provides an opportunity for a lift – and I think now that’s what we’re starting to see take place....MORE