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Economic Forecasts

A Better Decade Ahead for the Economy

A "Lost Decade" like Japan's? We've already done it. But, things are looking up for the coming one.

The past decade was a lost one for the U.S. economy, with almost no growth in a wide variety of measures. Stock values rose, then plunged, with the Dow Jones Industrial Average now at about the same point it stood at the start of 2000. The median income for American households adjusted for inflation stands at $49,777 -- 5% lower than it was 10 years ago. Real GDP gained a mere 20% from 2000 through 2009. And total employment was unchanged from the start of the decade to the end.

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The next decade won't be nearly as dismal. The pace of GDP gains will accelerate from the recent annualized growth rate of 2%, as orders continue to rise while productivity increases slow, requiring employers to add workers. The result will be to unleash pent-up demand, boosting growth.

But the pace isn't likely to match those of earlier decades -- the 3.2% average annual growth of the '70s and '90s, the 3% of the '80s or the 4.4% average of the '60s. Downturns brought about by a financial crisis typically slow the pace of economic recovery. Lenders stay tightfisted longer; businesses remain skeptical about the staying power of incoming orders; and consumers face paying down bundles of debt run up during the good times.

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Consumers will provide a bit less oomph, reflecting lower asset values this decade. Inflated home values and easy credit artificially pumped up demand for houses, appliances, flat-panel TVs and other goods, spurring consumer spending to a 70% share of GDP. But home values are now back to where they were in 2004. That, combined with the plunge in the stock market from its 2007 peak, has hammered household wealth. It's down 19% from 2007. Although demand will strengthen as the recession fades further into the past, consumer spending isn’t likely to provide the extra juice it did before the recession. As a share of the economy, it will ease back to the neighborhood of 66%, where it rested for decades.

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Congressional efforts to tame the federal budget deficit will also dampen growth as spending on roads, schools, etc., is reined in and as taxes increase. Also a factor: the end of rock-bottom interest rates as the economy starts gain some steam and the Federal Reserve tightens credit in an effort to hold inflation in check after pumping billions into the financial system to spark the economy.

Look for annual growth over the next five years to average about 2.75%, with the pace possibly picking up a tad more in the second half of the decade. By the end of the decade, some prerecession peaks will be regained: In a few years, median household income. Stock indexes, a bit later. And near the end of the decade, total U.S. employment, as the 8.4 million jobs lost are finally restored. But unemployment won’t return to its prerecession low of 4.4% until after 2020. Annual housing starts, average home prices and auto sales won't regain their peaks until after 2020, either.

Still, it’s a mistake to be too gloomy. Americans won’t lose their appetite for homes, cars and the latest electronic gizmos. They’ll pare back, but not dramatically. More exports may help. The U.S. gets only 12% of its GDP from sales to other countries, compared with 50% for Germany and about 30% for the U.K.

And don’t discount American innovation and entrepreneurship. What will “the next big thing” be? Maybe alternative energy. Or nanotechnology. Or possibly something no one imagines. A decade ago, few had heard of Google.

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