The Lay of The Land

Past recessions were caused by the Federal Reserve Board's decision to raise interest rates in order to slow the economy and dampen inflation. In that context, lower interest rates provided the trigger for the recovery. In the current downturn, interest rates are already at rock bottom levels. In fact, they are likely to edge up over the course of 2010 as the Fed continues to back away from some of the extraordinary measures used to sustain financial markets.

In sum, there is little reason to expect anything more than very modest growth in the United States (1-2 percent) in 2010, and probably not much better growth in 2011. Most domestic forces will be putting downward pressure on growth, especially state and local governments, whose cutbacks and tax increases will be an effective anti-stimulus.

Housing prices are likely to complete their downward adjustment in 2010 as temporary measures to support the market expire, such as the homebuyers' tax credit and the Fed's purchase program for mortgage-backed securities. The further downward movement in housing prices will be yet another factor restraining consumption growth. Consumption would have been very weak in any case, since real wages are likely to decline throughout the year and the economy will continue to shed jobs for at least the first couple of months of 2010, with jobs growing at only a modest rate the rest of the year.

There will also be more financial strains in the U.S. as continued high default rates on home mortgages and credit card debt is coupled with large losses on commercial real estate. This should not produce the same sort of crisis the economy witnessed in 2008, but there will be many more failures of small- and mid-size banks. Two of the largest banks (Citigroup and Bank of America) will continue to be weak, but likely have enough capital to survive at this point.

The one factor that could conceivably lead to a qualitatively different outcome in 2010 would be another large-scale stimulus package. However, the prospects for such a package look bleak at this point. The Obama administration has done a poor job of defending the package approved last February. As a result, much of the country has little understanding of the stimulus.

In fact, large portions of the electorate do not distinguish between the stimulus and the extremely unpopular TARP program that was used to support the financial system. Given this situation, developing the political support to get another major stimulus package through Congress would be an enormous political undertaking. President Obama shows no sign of going this route.

The path of continued weak growth and high unemployment appears the safest bet for 2010. It is certainly possible that growth could even turn negative as the effect of the stimulus starts to erode in the second half of the year.

Dean Baker is the Co-director of the Center for Economic and Policy Research in Washington D.C.

All opinions expressed in this blog are those of the author alone and do not necessarily reflect the views of Caixin Media.