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10 Reasons the U.S. Economy Is In for a Long Slump

When Ben Bernanke faces reporters today in the Federal Reserve chief's second-ever press conference, the overarching question is likely to be whether the U.S. economy is merely hitting a "soft patch" or is stuck in the mud.

The evidence is mixed, although skewing toward the latter. Bernanke, President Obama and other paid optimists point to a number of factors in arguing that the recent growth slowdown is temporary, including:

  • Supply-chain disruptions caused by the Japan earthquake are easing
  • Household spending and business investment in equipment are expanding
  • Commodity prices have fallen in recent weeks, boosting the economy
  • The tornadoes and floods that hurt economic results in the first quarter won't last forever
  • Foreign demand for U.S. goods and services is strengthening
  • Key leading economic indicators, such as the Treasury yield curve and consumer expectations, are bullish
Seeds of stagnation
Others, such as New York University economist Nouriel Roubini (once blithely dismissed as "Dr. Doom" until he correctly called the 2008 housing crash), argue that the economy is plagued by more chronic problems. Here are 10 reasons to think we're in for a much longer slump:
  1. Consumers and businesses will focus on reducing their debt for years to come, depressing consumption and investment
  2. Stagnant wages and widening income inequality curb economic growth
  3. Home prices and sales have yet to bottom out, sapping household wealth
  4. Oil prices remain at historically high levels
  5. State and local governments are slashing spending and face large budget shortfalls
  6. Key economic sectors, such as manufacturing and retail real estate, show significant excess capacity
  7. Greece, Portugal and other ailing eurozone countries are beyond repair and are certain to default on their debt
  8. The U.S. federal deficit and debt is unsustainable over the long-term
  9. GDP growth in China, Japan, the U.K. and other major economies is slowing
  10. Governments in the U.S. and Europe are withdrawing monetary and fiscal stimulus even as their economies weaken
War without bullets
This last point touches on what may be the best reason to fear the worst -- a failure of leadership. Mired in factional conflict, Washington has chosen the wrong policies. The White House, Congress and Fed have ignored economic precedent in seeking to spur growth and buckled to political pressure by pinning recovery hopes on austerity. In Europe, a long-simmering divide between "core" countries and "peripheral" states now threatens to fracture the EU. That leaves leaves political leaders with a narrowing set of options, Roubini says:
If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed. If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies.
There is, of course, another possibility that Bernanke has yet to fully address -- that the U.S. economy is disabled in both the short term and the long.

Under this scenario, which has prevailed after previous major financial crises in this country, the economy alternates between periods of spinning its wheels and gaining traction. Growth rises for a quarter or two, then falls. Jobs return, but not in sufficient numbers to significantly reduce unemployment. We proceed at a crawl. The recession ends, but the recovery never fully gets under way.

Map from the Federal Reserve Bank of San Francisco; image from Wikimedia Commons