Why the U.S. Will See Slower Growth Than in Previous Recoveries

homes for sale in Larkspur, California
homes for sale in Larkspur, California

A few more meals out and some new clothes? You can probably manage that this year. A new car or a bigger house? Not likely.

That's the gist of a report released by UCLA's Anderson School of Management on Tuesday on how quickly -- or in this case, slowly -- the U.S. economy will recover from the recent Great Recession.

Economic growth will be slower to rev up this time than in the typical recovery after previous postwar recessions because of a combination of factors, including fewer new-home purchases -- which feed industries ranging from construction to financial services -- and lower spending by cash-strapped local and state governments. As a result, companies will be slower to rehire workers, while consumers will be more conservative with their spending, according to the report.

Overbuilt Housing Sector Drags on Recovery

California's economic recovery will be even slower than the rest of the country's. The most populous U.S. state overbuilt housing before the recession more than other regions did, and the resulting sparsity of residential construction over the next few years will put a damper on California's growth, according to the UCLA Anderson Forecast study.

Annual U.S. gross domestic product will increase about 2.9% for 2010 through 2012, compared to the 5% average annual growth rate during the recovery periods after the 11 recessions since World War II, the study showed. The current recovery period, which actually began during the third quarter of 2009, will be similar to the subdued recoveries of the early 1990s, when the downturn was less pronounced, and the period after the Internet bubble-induced recession of 2001.

And that's a big problem. "To get Americans back to work, we need 5% growth," says Edward Leamer, director of the UCLA Anderson Forecast.

The study provides little comfort for those looking to regain some of the equity they've lost in their homes over the last few years. The median price for a U.S. home sold in April was $173,100. While that was 4% more than a year earlier, it's still about 14% less than in April 2008, according to the National Association of Realtors. "We see absolutely no signs that housing is going to lead the recovery," says David Johnson, chief financial officer of Fannie Mae and keynote speaker at the UCLA Anderson Forecast.

Restrained Consumer Spending

"The normal recoveries with exceptional growth and very favorable job markets have been driven by an expansive consumer buying homes and cars after sitting on the sidelines for a year or more," wrote Leamer, in the report. "That is unlikely this time."

Granted, those fearing an interest rate spike with the economic recovery may be comforted by the fact that three-month Treasury rates, which recently hit historic lows, are unlikely to exceed the 3% threshold within the next two years.

Still, U.S. job-seekers will find little from the study to celebrate. Unemployment -- which recently peaked at about 10%, higher than in every postwar recession except for that of 1982 -- will fall by only 1 percentage point to about 9% over the next two years, according to the report. In fact, non-farm employers, who cut about 6% of their workforce between late 2007 and late 2009, are forecast to hire back just two-thirds of those workers during the next two years.

Slow Recovery in California

California's recovery will be slower than the Anderson Forecast estimated last year, because of reduced demand from an economically challenged Europe and a slower-than-expected Asian recovery. That combination will leave the state's unemployment rate at about 12% for the rest of the year and above 10% until 2012.

For Los Angeles, the prognosis is slightly better than for the rest of the state, because the region's pre-recession housing buildup wasn't nearly as pronounced as inland areas of California, while demand from Asia for Southern California's Los Angeles and Long Beach ports will also help local industries, according to the UCLA report. The Los Angeles region, which lost about 150,000 jobs in trade and professional and business services since late 2007, will recover about 40,000 of them over the next year, while educational and health services and hospitality will also have job gains.

"A rebound of imports would provide a boon to the recovery of employment in this sector, which employs nearly as many Angelenos as the construction industry and the federal government combined," wrote Julia Thornton Snider, an economist with the UCLA Anderson Forecast, in the report.