America's fragile economic recovery will pick up steam next year, but only after rising unemployment tops out above 10 percent, the chief economist of Wells Fargo told IAMC.

Addressing the Fall 2009 IAMC Professional Forum in Minneapolis last month, Scott Anderson said that "economic growth has returned, signaling the end of the great recession of 2008 and 2009, but the economy remains fragile. Capacity utilization is at the lowest levels we have seen since the Great Depression. It will take quite a bit of growth and time to get back to normal capacity utilization."

Dr. Scott Anderson

The Minneapolis-based vice president and senior economist for Wells Fargo analyzed the recession and offered predictions for America's economic future in a presentation titled "Navigating the Aftermath: Where Do We Go From Here?"

The crisis that began to grip the country last year was the worst downturn since the Great Depression of the 1930s, said Anderson. "The U.S. economy has been hit by the equivalent of a financial hurricane," he said during the closing general session of the IAMC Forum at the Minneapolis Hilton & Towers. "I do not think we will see another recession like this in our lifetime."

The impacts of the recession have been both deep and wide-reaching, he noted.

"Payrolls have dropped by 7 million. We lost about 3.8 million jobs in the 1981-1982 recession, and we have nearly doubled those losses this time," the economist said. "We will still see net job losses through the end of this year. We are now losing about 250,000 jobs a month. Unemployment is at 9.7 percent and will peak at 10.2 percent in the first or second quarter of 2010. That is up from 4.8 percent at the start of the recession."

Joblessness has hit the country unevenly, he added. "Unemployment rates are above 20 percent in the Central Valley of California," Anderson said. "There will be some consequences from the economic shock. The question is, where do we go from here? Is this recovery for real, or is it a mirage?"

'The Banks Have Money Now'
After experiencing total household wealth destruction of $4 trillion in real estate value and $5 trillion in stock value, America is on its way back, he said. "Stocks are up more than 50 percent from March lows. The market has gained back more than $3 trillion in value. U.S. economic growth resumed in the third quarter," said Anderson.

"Companies are getting their inventory-to-sales ratio down, and that is helping. Jobless claims are coming down, and prices are coming down tremendously from where they were a year ago when the price of oil skyrocketed," he said. "Manufacturing and services are rebounding. We are seeing industrial production increasing."

Even the liquidity crisis is over, he added. "Spreads are back to where they were before the banking collapse. The banks have money now. Excess bank reserves are now at about $800 billion."

However, the economist noted, the banks are not in any mood to lend that money. "They are not using it," he said. "They are still concerned about extending credit."

As a result, said Anderson, the Fed is not expected to start raising interest rates until the second half of next year. "The only direction for rates to go right now is up. The only question is when and how fast?"

Anderson told IAMC attendees not to expect Fed action until well after unemployment hits its peak. The average time between that occurrence and Fed action to raise rates is about 12 months, he said. "So you are looking at early 2011. We think it may actually occur a little sooner than that," he noted.

Anderson said that corporate executives should thank the government for helping get the nation's economy back on track. "Bernanke did a remarkable job," he said. "He was much earlier to recognize what was happening in the economy than the rest of the banking sector. We are now starting to get some hard numbers on the impact of the economic stimulus bill. Cash for Clunkers added a half point to GDP in the last quarter, and next year we will see another $230 billion in direct stimulus, which will add about 1.5 points to GDP. Without this stimulus package, we would probably still be in recession."

Pitfalls Could Hinder Recovery
The question, he said, is to what point will economic growth return? "Growth will resume, but we are perhaps looking at slower growth for the U.S. for at least the next five to 10 years," he said. "Growth will probably hover around 2.5 percent during that time."

Anderson noted the risk of a possible "double-dip recession in 2011 if we don't get the consumer and the banking system a lot stronger." Among factors that could hamper recovery include:

• Delinquency rates that are still very high for bank loans. "The banking system is still in very bad shape," he said. "Don't expect the banks to go running out and be lending money to customers anytime soon."
• Unusually high bankruptcy rates. "We are now back up to what we were before the bankruptcy law change of 2005," he said.
• Reluctance by companies to expand. "A recent survey shows that businesses are still going to cut back on capital spending and hold off on hiring workers," he noted.
• Lagging consumer confidence. "Consumer confidence has been rocked, and it remains very low," he added.
• High household debt levels. "Debt levels have barely come down as a share of income," he said. "It will take years to see that debt level come down. It takes five, maybe 10 years to escape from this. There is still another wave of foreclosures on the horizon."

Hope can be seen in the fact that banks are starting to ease up "a little bit on the pace of their tightening," said Anderson. "And some people have seen their home values go up a little bit over the past three months. The housing market, which has been contracting for four years, has hit bottom. Home sales data have been going up for the past six months, and inventories are coming down."

For commercial real estate, the comeback has yet to begin, he said. "We are in a two-to-three-year adjustment in commercial real estate. It always follows the unemployment rate. Rental growth is still dropping. Retail will be very weak. Industrial is somewhat better."

For the time being, global economic growth will be bolstered by the developing nations. "The good news is that we are looking at a much stronger global economy than what we had in the 1990s when Japan was in its lost decade," Anderson said. "Most of the growth today is coming from countries like India and China."