GDP Growth Fastest Since Early 2010
Danielle Kurtzleben

GDP growth has sped slightly, but recovery could remain slow, prolonged

The Commerce Department announced that GDP increased by 2.8 percent in the fourth quarter of 2011. The figure comes in just shy of experts' projections of 3 percent, but is also far stronger than the previous quarter's 1.8 percent.

Evidence of stronger economic growth is a welcome change.

Nearly three years into the recovery, slow growth and constant prognostications about the prospects for recovery have become a fact of life in the U.S. Below we debunk three common misconceptions about when and how a strong recovery might finally take shape.

The Recovery Is Going Unusually, Alarmingly Slow

Uncomfortably slow? Certainly. But plenty of economists are not surprised by the snail's pace of job and GDP growth that the United States has taken since the Great Recession. In their 2009 book This Time Is Different,Peterson Institute for International Economics Senior Fellow Carmen Reinhart and Harvard University Professor of Economics Kenneth Rogoff point out that recessions following financial crises are often particularly deep, making for recoveries that are especially prolonged.It is "the extraordinary depth of the recessions...not the slow recoveries thereafter" that lead to the long recovery periods after financial crises, said Princeton Economics Professor Alan Blinder, echoing Reinhart and Rogoff's book, at a Senate Budget Committee hearing Thursday about the economic outlook. "It takes a long time to climb out because the hole is so deep, not because the ascent is so slow," he added.

The Recovery Will Continue Being Slow

Anemic growth now doesn't necessarily presage anemic growth in the future. Housing is perhaps the biggest drag on the U.S. economy right now, affecting credit and job markets, but the prolonged housing doldrums have created a backlog of people who want homes. When that dam bursts, it could create a new surge in home sales. Joel Prakken, chairman of consulting firm Macroeconomic Advisers, told the committee on Thursday that pent-up demand could eventually make for a quick pickup in the housing market: "Steadily accumulating pent-up demographic demand suggests the U.S. will have to build an average of perhaps 1.5 million units per year over the coming decade." In contrast, annual housing starts as of December 2011 were at 679,000. .

Should such a boom come to pass, the effects could be wide-ranging, providing construction jobs and loosening credit. David Shulman, senior economist at the UCLA Anderson Forecast says that those effects could extend into further job and business creation. "A lot of small businesses get financed initially or get financing later on through people refinancing their houses or getting second mortgages on their houses," he says. "That channel is blocked this time, because of the housing collapse." Should housing recover strongly, people could again use the wealth in their homes to fund their business ventures.

We Know How Long Recovery Will Take

It seems that everyone with an interest in economics -- government institutions, academics, financial services firms -- has their own forecast of GDP or employment growth. Those predictions may reflect the best available methods and data, but they still are subject to substantial changes, as new shocks and threats are introduced.

Projecting where the economy will go is "an impossible thing to do," Ike Brannon, director of economic policy at the American Action Forum, told the committee on Thursday, framing forecasts as crude approximations. "If you look at forecasts, the way they work, generally people forecast next quarter something close to what this quarter is. And then the quarter after that is some kind of combination between long-run growth and what it was last quarter. This isn't really a science ... and it's subject to all kind of contingencies that might happen."

Recently, the Federal Reserve revised GDP forecasts downward from its November estimates. In just two months, the Fed pulled back its 2012 and 2013 projections by 0.2 to 0.3 percentage points.

The ever-shifting threat from the European financial crisis is an excellent example of an outside shock that could greatly alter U.S. GDP growth. Blinder forecasts that 2012 growth in the U.S. will be around 2.5 percent "minus whatever we lose to bad macroeconomic luck," particularly fallout from the European crisis. And while Europe is the crisis du jour, the future holds any number of other unforeseeable shocks to the system.