January 28, 2010
It seems evident that the U.S. economy pulled back from the brink of depression in 2009. But on the surface, it's not easy to discern what 2010 has in store. In a recent interview, T. Rowe Price Chief Economist Alan Levenson looked past the headlines and identified the trends he believes will dictate our economic path going forward.
Levenson says that he was not too surprised to see economic figures perk up a bit at the end of 2009. In a way, it's almost as simple as the economy stopped contracting. Once demand for products and services stabilized, even at a low level, businesses that had been frozen in place needed to gear up production to meet it.
The larger question will be how robust and sustainable the rebound will be. Historically, the U.S. economy has bounced back fairly aggressively in the first year of a recovery. With so many challenges remaining in the housing and credit markets, Levenson expects any expansion to be more modest. But he does see some significant potential for economic growth especially since the consumer's financial position now is much better, emphasizing much better than it was a year or 18 months ago.
The Federal Reserve took extraordinary measures to head off a depression in 2008 and 2009. But eventually, the Fed will need an "exit strategy." It's going to have to scale back on the stimulus it created or run the risk of overheating the economy and generating inflation.
Looking forward, Levenson is watching the Fed's choices with some interest. With the unusual actions the Fed took during the recession to keep banks open and credit flowing, it will take a creative strategy merely to return to normalcy.
Levenson sees similarities between our current economic environment and the environment in 2002. We had emerged from a recession in 2001, but larger systemic issues continued to weigh on growth for most of the year.
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