4:46 p.m., Jan. 14, 2009----The current economic recession is likely to last into the second half of this year, with overall economic growth remaining below 2 percent, Charles I. Plosser, president and chief executive officer of the Federal Reserve Bank of Philadelphia, said during the 2009 Economic Forecast on Wednesday, Jan. 14, at the University of Delaware's Clayton Hall.

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“I expect the housing sector will finally hit bottom in 2009 and the financial markets will gradually return to some semblance of normalcy. So my forecast sees the economy starting to slowly recover in the second half of 2009 and building up more momentum in 2010,” said Plosser, who was the featured speaker at the annual event, hosted by Lyons Companies and the University of Delaware Center for Economic Education and Entrepreneurship.

The event opened with remarks by University of Delaware President Patrick T. Harker and an introduction of Plosser and panelists by David Lyons.

Plosser said economic growth in 2009, which follows negative growth in 2008, is likely to remain below two percent this year. He added the current recession could be one of the longest since World War II, but not as deep as the recession in the 1980s that saw the unemployment rate rise to more than 10.5 percent.

“I do not expect the unemployment rate to stray into the double digits during this recession,” Plosser said. “Yet, I also don't expect it to begin coming down soon. Keep in mind that unemployment is a lagging indicator. It will not begin to come down until after the economy is well on its way to recovery.”

Plosser cautioned that while the unprecedented measures taken by the Federal Reserve will have a positive impact in the short run, excess liquidity could cause major inflation problems in the long run.

“I believe we need to monitor liquidity and its composition closely, so that we are able to withdraw it when the time comes or else we risk fueling inflation in the future,” Plosser said. “Thus, it is not appropriate to ignore quantitative metrics in this new policy environment.”

Panel discussion

The event included a panel discussion by Plosser and national and global economists Michael K. Farr, president of Farr Miller & Washington, LLC, and David R. Malpass, of Encima Global, LLC, led by James B. O'Neill, University of Delaware professor of economics and director of the Center for Economic Education and Entrepreneurship in the Lerner College of Business and Economics.

Malpass said the current recession is rooted in several factors, from the “free lunch” in the form of low interest rates from 2003-06 that were championed by Alan Greenspan, former chairman of the Federal Reserve, to loose lending standards and a weakening U.S. dollar that caused capital flight and a spike in the trade of gold and commodities.

The bankruptcy of Lehman Brothers sent the economy into a sharp slide, as investor confidence was further eroded, Malpass said. The negative impact on the markets is now being fixed and the ongoing purchase of mortgage-backed securities by the Federal Reserve are reasons for optimism that the economy will experience positive housing market trends and, therefore, begin to recover later this year.

Farr blamed low interest rates, the explosion of securitization of risky loans, and a culture of blaming someone else, even by many homebuyers who misrepresented their income to buy homes they could not afford, for some of the economic problems that the country is facing.

The current recession, Farr said, has already run longer than nine of the last 11 recessions, but “recessions are a normal part of the economic cycle and are indeed necessary for the long-term health of the economy.”

Farr predicted that the economic contraction will continue through the end of 2009, but the expected bottoming of housing prices and improved credit markets will lead to recovery, but a large inventory of housing -- now at 11 months' worth, compared to a normal supply of four months -- will slow the recovery.

The Delaware economy

O'Neill told the audience of about 400 business and community leaders, educators and students that while the Delaware economy also is facing some problems, the rejuvenation that the state experienced from the Financial Services Act in the 1980s should serve as an example of how the spirit of entrepreneurship can turn a problem into an opportunity.

“It's time for our state to recognize the strength we have -- that we are not a state economy, we are a regional economy and we have some effect that goes well beyond our borders,” O'Neill said.

“We have a governor-elect (Jack Markell) who believes in entrepreneurship,” O'Neill said. “We also have someone who is coming in as director of economic development who has some experience in the private sector, who will be seeking to push the state of Delaware forward. So, even though it seems like bleak times, be optimists, things will get better.”

Article by Martin A Mbugua
Photos by Duane Perry