5 Reasons Why the U.S. Economy Might Recover Faster Than You Think in 2009

U.S.News & World Report

5 Reasons Why the Economy Might Recover Faster Than You Think in 2009
Monday December 22, 10:01 am ET By James Pethokoukis

Let's all hope Barack Obama is wrong when he says that getting the U.S. economy straightened out "will take longer than any of us would like -- years, not months. It will get worse before it gets better." And let's pray that Joe Biden is way off when he says the economy is in danger of "absolutely tanking." But, to be honest, far more economists would pretty much agree with those pessimistic statements than the number that wouldn't. (Though that is a good contrarian sign.) Most regular Americans, too. Still, there are a numbers of reasons to think that the economy might, just might, shift back into gear faster than most of us think or hope:

1) Plunging oil prices.
It was only five months ago that oil prices hit a record high of $147 a barrel. Now they're below $40 thanks to slowing global demand. At the same time, gas prices have plunged from over $4 a gallon to around $1.67 nationally. (And some analysts think they're heading to a buck a gallon.) And just as high energy prices were a drag on the economy last summer, they're giving it a boost heading into 2009. JP Morgan Chase economist James Glassman estimates that the drop in oil prices represents "a boost equivalent to a $350 billion stimulus." To bring that down to the average consumer, Glassman explains, think of it this way: The typical household drives 15,000 miles annually. So a drop in gas prices to, say, $1.50 a gallon would represent a savings in their annual gas bill of $2,500 from when gas was at $4. This could boost GDP growth by as much as two percentage points.

2) Falling mortgage rates.
If there's anything falling as fast as energy prices it's mortgage rates. Rates for a 30-year, fixed-rate mortgage fell to a low, low 5.19 percent last week thanks to the Federal Reserve's pledged efforts to purchase mortgage securities. That should help housing affordability and the ability of current homeowners to refinance their mortgages. And even more good news could be on the way if you don't mind Uncle Sam borrowing billions more for yet another bailout: The Treasury Department is reportedly considering a plan to push mortgage rates to as low as 4.5 percent for new homebuyers and, perhaps, even for current homeowners who want to refinance. Investment strategist Edward Yardeni thinks if rates could get pushed down to 4 percent, either via the Fed or Treasury's efforts, the economic impact would be amazing. He figures that the average rate on the $10 trillion in outstanding mortgages is about 6 percent. A two-percentage-point drop would amount to a $200 billion annual tax cut for the 45 million American households with mortgages.

3) Actions by the Federal Reserve.
The nation's central bankers have basically said that they'll do whatever it takes to strengthen the economy. They've already pushed short-term interest rates to near zero percent and have made it clear that the Fed will buy various debt securities to unfreeze the credit markets. Brian Bethune of IHS Global Insight called the Fed's recent moves "exactly the kind of forceful medicine the economy needs as it plumbs the depths of the current recession. The Fed's actions will translate into much lower effective borrowing costs in the next few weeks." Certainly this is not your grandfather's Fed. The central bank is pouring money into the financial system. That's a big difference between now and the Great Depression. "In the Depression," notes economist Brian Wesbury of First Trust Advisers, " the real problem was that the Fed let the money supply collapse ... This is not happening now. The Federal Reserve ... is adding liquidity to the system as rapidly as it can."

4) Obama's stimulus plan, 2.0.
It now looks like Uncle Sam, under the direction of Obama and the new Democrat-controlled Congress, will spend somewhere between $750 billion and $1 trillion over the next two years to boost the economy. The money would be spent, according to analysts, mostly on infrastructure (everything from transportation to broadband to green technology investment) but also on aid to state and local governments and middle-class tax relief. This plan will probably create somewhat more jobs in the short term than if nothing were done. Obama optimistically hopes as many as 3 million. The real question is whether his spending plan is the best use of that amount of taxpayer money. Economists Susan Woodward of UCLA and Robert Hall of MIT are dubious. In their cowritten blog, the duo opine that "complicated projects take time to ramp up to high spending and employment levels." But, most promsing, there are rumors that Obama may be considering a payroll tax holiday. That would put money into the economy much faster than an infrastructure spending plan. Even better, many studies say, would be sweeping tax cuts on incomes, business and capital.

5) America's deep fundamentals.
Did you know that the World Economic Forum--the Davos people--for the second straight year judged the United States as possessing the most competitive economy in the world? (Then came Switzerland, Denmark, Sweden, and Singapore.) Among America's strengths: innovation, flexible labor markets, and higher education. Not surprisingly, though, our institutions ranked a dismal 29th. (Thanks, Wall Street.) Overall, the core U.S. economy is in far better shape than it was in the 1970s, with a higher productivity and a better tax and regulatory system. Even though the American economy finally succumbed to the oil shock and the credit crisis in 2008, it held up longer than many predicted thanks to its deep strengths. Who knows, maybe it will surprise the bears again in 2009.

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