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By Ben Johnson, CFA | 10-03-2013 01:00 PM

U.S. Economy: Standing Still or Standing Up?

The next 12 to 18 months will be slow and painful, but America's fundamentals support longer-term optimism, says University of Chicago economist Austan Goolsbee.

Ben Johnson: Our speaker today during lunch is someone who really had a front seat to some of the worst of the financial crisis. Austan Goolsbee was the chair of President Obama's Council of Economic Advisers.

Having, I think, paid his dues, no one can blame him for taking a new tack and coming back to Chicago, where he is now a professor of economics down the road at the University of Chicago.

So, with that, I'd like to introduce and cede the stage to Austan.

Austan Goolsbee: Thank you. There is always a tension when you come to the conference, and they feed you lunch, and then they bring the economist in to speak and see if they can get you to throw up your food before the lunch is even over, because economists are not usually the most optimistic people in the world, I would characterize.

I am going to discuss the state of the economy in the U.S., the state of the markets, what's coming out of D.C., and what's ahead beyond the short run. I am going to end on what I think you will agree that, at least for an economist, is a fairly optimistic note, but not before really depressing the crap out of you.

If you are at heart a pessimistic person, many of the things that I am going to go through in the first two points today you are going to say, "I knew it. I knew the world was going to hell in a handbasket and that just confirmed it."

So, the first thing that I wanted to talk about is, what is the economic outlook for the next 12 to 18 months? What is the market outlook? Where should we expect to see growth or where are we not seeing growth?

I think this is still basically the same question as, "What happened to the V-shaped recovery?" So, in the past, it always was the case that the deeper was the downturn, the faster was the rebound, and so it was supposed to be a V-shaped recovery. In the time I was in Washington, they evolved. First they were talking about a V-shaped recovery, then they moved to U-shaped recovery, onto L-shaped recovery, which is not even the shape of a recovery. They have since moved into the Arabic script and Greek letters describing the shape of the recovery.

The fundamental question of why didn't growth come back faster is quite important for us to think about if you want to consider, what are the prospects in the near term. Conventional wisdom holds that it was a financial crisis-based recession. There had to be a lot of deleveraging, and if you look around the world, wherever there are big deleveraging recessions, they are long, slow, painful, and extended. I think that is true. But I think that's been overblown.

I think the recession that most resembles this one and the recovery, is the 2000 recession. It was on a much smaller scale, but in 2000, there was virtually no leverage at all. But the common component was that it followed a bubble. The transformation required after a bubble popping is also a slow painful process, is different than deleveraging, and I think is the overwhelming most painful thing making this recovery slow.

The two drivers of economic expansion in the 2000s, as you know, were consumer spending growing faster than income and residential housing construction. Consumer spending growing faster than income brought the national savings rate of the United States at two points in the 2000s to negative numbers. So, if you added up all the personal savings of everyone in America combined, it was less than nothing at two points in the 2000s. Now, you do not need to go to an advanced session at this conference to understand that's not a sustainable way to drive an expansion. And all of the V-shaped recoveries that we've had in the U.S.-- in 1982 to '84, 1975,--they all had the feature that the economy could go right back to doing what it was doing before the recession began. And this time fundamentally we could not do that.

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