The robust consumption growth of the 2002–2007 expansion was fueled in large part by the rise in real estate values and the ease with which homeowners could cash in on rising home equity. ...This situation prompts some analysts to predict that this will lead to a much-slower-than-normal recovery. But there are several factors that argue against this. Fear of unemployment, not falling home prices, is the principal factor influencing consumer spending, and the fear of becoming unemployed far exceeds the reality. ... unemployment will rise, at most, 2 percentage points [from 9.8% now], far less than the reported 30% to 40% of workers who fear they will be laid off. And as the economy mends, the fear of being unemployed will subside, and consumption will rise. Furthermore, consumption is not the whole economy. There are several other sectors that are likely to boost growth. Housing starts have fallen about 75% from their 2006 highs, but the current level of 500,000 starts per year is less than one-half of what is needed to accommodate increased population and household formation. Additionally, we have increased spending by the government on infrastructure that is part of the stimulus package. Finally, our trade deficit has shrunk by more than 50% from its level before the crisis, as our exports have remained surprisingly strong. This all supports gross domestic product growth of 2% in the third quarter.
One of the most intriguing and positive aspects of the current downturn is the increase in productivity growth. We will be getting more data as the quarter progresses, but preliminary evidence suggests that productivity growth may have accelerated during this economic downturn.
---Jeremy Siegel, Q209 Summary