Economist: U.S. faces “very different” recovery

John Silvia

As chief economist for Wells Fargo, John Silvia ranks among the top forecasters in the United States. But he said his job is only getting more difficult as the country experiences what he considers a different kind of recovery.

“The character of this recovery is very, very different than anything we’ve seen before,” Silvia said during a presentation hosted by Wells Fargo in Grand Junction.

In his presentation at Mesa State College and an interview with the Business Times, Silvia said the United States has enjoyed modest growth since emerging from the Great Recession, but at a pace less than previous recoveries. The labor force has yet to return to pre-recession levels and housing starts remain slow. Meanwhile, inflation pressures are likely to increase and federal government officials face mounting budget deficits related to entitlement programs.

There’s also reason for some optimism, though, Silvia said. The Grand Valley enjoys a more diversified economy that benefits from tourism. While prices currently remain low, natural gas offers an alternative to other energy sources that ultimately will boost production activity.

While the Grand Valley housing market has declined, it’s not nearly as bad as many areas of Florida or Nevada, Silvia added. And part of the high unemployment rates in Mesa County can be attributed to a younger work force more prone to change jobs, he said.

In his presentation at Mesa State, Silvia focused on a number of economic fundamentals, including growth, profits and inflation.

While Silvia doesn’t believe a so-called double-dip recession will occur, growth remains modest with forecasts in the range of an annual rate of 2.5 percent to 3 percent. That’s less than the 4 percent to 5 percent growth more typical of the early states of recovery.

Indicators tracking the manufacturing sector, orders for capital goods and corporate profits all show strength, he said. In large part that’s a reflection of growth aboard, especially in Asia.

While businesses are producing more, they’re not hiring a lot of additional staff to do so, he said. So the U.S. labor force remains below pre-recession levels. “Three years into economic recovery and we’re not close to getting back to zero.”

New home construction remains slow as well, Silvia said. While some job and income growth, along with low interest rates, should bolster buying, uncertainty over pricing persists, he said.

Negative equity has contributed to foreclosures, but the situation in Colorado is far better than other areas of the country, he said. As of the fourth quarter of 2010, about 20 percent of outstanding mortgages had negative equity. By comparison, more than 47 percent of mortgages in Florida, nearly 51 percent of mortgages in Arizona and more than 63 percent of mortgages in Nevada have negative equity.

While the steepest declines in housing prices have occurred, Silvia expects the recovery to remain slow in areas with excess supply.

Commercial construction has fared better in part because of increased manufacturing activity, and the rental market also has improved, Silvia said.

Inflation likely will increase, although probably not at an extreme level on either end of the spectrum, Silvia said. “It’s not zero and it’s not 10. … We have it and it’s clearly rising.”

Meanwhile, the United States has entered what Silvia described as “unchartered waters” in terms of budget deficits. Those deficits are likely to increase as spending on Medicare and other entitlement programs escalate. Government officials as well as citizens face some hard choices, particularly as aging baby boomers put additional strain on the system.

In Colorado, personal income has increased, although not fast enough to overcome ongoing state budget problems, Silvia said. Venture capital financing continues to flow to high-tech industries, although at levels far below those seen during the tech boom.

The Grand Valley enjoys a diversified economy, Silvia said, with some sectors reporting job gains in recent months — among them manufacturing and professional and business services. Despite those gains, unemployment remains elevated in Mesa County. Silvia attributed part of the situation to a younger labor force that tends to more frequently quit and change jobs rather than any structural problems with the local labor market.

Residential construction activity remains subdued, although declines in home prices appear to have moderated, he said. “I wouldn’t be too pessimistic about it.”