November 3, 2009
Feldstein Message:
Consider That The Economic Recovery
Is Not Sustainable
In a sobering assessment
delivered at Southwest Corporate’s 32nd annual Economic Forum,
economist Martin Feldstein warned credit unions of the “substantial risk” that
exists for another economic downturn in 2010.
“The recent recovery has
been driven by temporary factors. The Cash for Clunkers program has bolstered
the auto industry, and the first-time home buyers’ credit has supported the housing
industry. Without further incentives, there’s danger this upturn won’t be
permanent,” Feldstein told the record-breaking crowd of 470 attendees at the
Economic Forum in Dallas in late October. Feldstein was one of a dozen speakers
at the three-day event, which also included a free Financial Management Series
conducted by Southwest Corporate Investment Services.
A member of President Barack
Obama’s Economic Recovery Advisory Board, Feldstein also served on President
George W. Bush’s Foreign Intelligence Advisory Board and as President Ronald
Reagan’s chief economic adviser. In addition, he held the position of
President/CEO of the National Bureau of Economic Research for almost 30 years.
The current recession is
different from those of the past, Feldstein said. In previous recessions, the
Fed’s monetary policy had room to move rates lower to eventually spark a
recovery.
“That is not the case here.
The reason for this recession is asset bubbles – risk mispriced for homes and
stock market securities. The added burden stemming from deteriorating home
values, lower stock prices and weak spending has created such a dilemma that
altering the rate environment has little effect.”
Feldstein suggested GDP
growth might be negative in 2010 and identified three impediments to robust
growth: continued weak consumer spending, declining residential and commercial
real estate values, and a dysfunctional banking system that is restricting
access to credit.
A sustained recovery will depend
on consumers, he said, but unemployment, declining real income and a negative
wealth effect make that unlikely. “Employment continues to decline and at a
faster rate than before, and many who are employed are working fewer hours.
Manufacturing is down, and consumer confidence is the lowest in 25 years.”
Feldstein projected a
10-year fiscal deficit. “We will be leaving enormous debt for future
generations. Even with a 7-8% savings rate, we will have to depend on a serious
inflow of capital from around the world. If other countries decide not to
invest in the U.S., interest rates will have to rise.”
With the current high
unemployment environment, the Fed would meet significant resistance in raising
interest rates.
“I may be wrong. I hope I’m
wrong,” Feldstein offered, “but you may want to at least think through these
risks.”
