Since the middle of last year our working hypothesis has been that the U.S. economic recovery from the Great
Recession had been a two-phase experience, with a step up to a third phase in the offing.
The first phase, beginning in 2009 and lasting about four years, was the disappointing “new normal” with output
growth of about 2%, and job creation well below 200 thousand per month. Unemployment declined, but in
significant part because of a decline in labor force participation.
But after mid-2013 things began to look up. Phase two had growth slightly below 3%, with job creation at or above
250 thousand per month on average. Labor force participation stabilized, but unemployment continued to
decline. The improvement was broadly based, with stronger spending by both consumers and business.
Government spending shifted from decline to flat. There was even improvement in the trade deficit largely due to
Our forecasts showed this second phase providing the basis for a further improvement this year and into 2016, with
growth rising above 3%. Consumption was seen strengthening further, as was business investment. We
thought the housing sector would re-accelerate. Government spending was expected to go from flat to slow
Our current forecast abandons that optimistic phase three scenario. Rather than a basis for further progress it is
consistent with the view that phase two was largely the result of the energy sector boom (bubble?). With the boom
ended (at least for now), the economy is sinking back part way toward the new normal. Not all the way, since a lot of
the damage done to household balance sheets has been repaired, and government sector finances are in better
This post comes from Bill Witte of Witte Econometrics and was part of a forecast summary that we recently sent to our subscribers. Bill produces the economic forecasts that we utilize in all of our services to our clients.
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