Even a recovery will be painful, says economist

“Cash for everything” government stimulus programs will help the economy look better through the end of the year, but the positive numbers won't hold up through the first quarter of 2010, according to economist Marci Rossell. Speaking in Atlanta today at the Investment Management Consultants Association's fall conference, she offered generally encouraging perspectives on the state of the economy, but warned that recoveries can be painful. “All of these cash-for-everything programs are just taking money from one part of the economy and moving it to another. It's just borrowing growth from next year,” said Ms. Rossell, who has worked for CNBC and OppenheimerFunds Inc. as an economist and is now independent. The economy is likely to grow by between 2% and 2.5% next year, but 3% growth was achievable had the government not introduced so many programs aimed at stimulating the economy in the short term, she said. Ms. Rossell expects unemployment to peak at around 10% and stay there for three or four months until unemployment insurance programs and extensions start to expire. “The longer you offer unemployment insurance the longer it will take somebody to find a job” because they are less motivated to seek work, she argued. Ms. Rossell linked the fluctuating consumer savings rate to both the housing bubble, which gave people a reason to save less, and the recession, which was worsened by a drastic reduction in consumer spending. “Two years ago when the savings rate was at zero, people weren't saving because they were going to use their house to fund their retirement,” she said. “But the increased savings rate, now at around 6%, is what caused this recession.” Eventually, the savings rates will reach equilibrium at around 7%, Ms. Rossell said. Housing is where the real bad news lurks, she said. “I've had nothing good to say about housing for a decade,” Ms. Rossell said, adding that she has been renting since 1999 because she didn't like housing prices. While she believes that for the first time in a decade, those with the median household income (now $55,000) can afford the median-priced home (now around $170,000), she anticipates a long, slow recovery in housing. “We've hit bottom with housing, but there is still another big round of mortgage rate resets coming over the next few years,” she said. “The housing recovery will take a long time.”