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Recession Nearing an End, but Economic Recovery Will Take Years

Hooray, the recession is over! Let's drink a toast, buy a humungous TV and open the throttle on our 401k plans.

If only it were that easy. Although signs do suggest the U.S. economy is stabilizing, it's likely to be in rehab for several years (and as any 12-stepper knows, you never fully recover). The Congressional Budget Office projects that the federal budget deficit for 2009 will hit $1.6 trillion, or 11.2 percent of GDP. That's a massive jump over 3.2 percent of GDP in 2008 and the highest level since World War II.

The major problem is that the country is spending much more and making much less. Total revenues are plunging, dropping an estimated $400 billion, versus outlays this year alone of roughly $700 billion. Investment is vaporizing. And let's not even get started on the projected cost of health reform (although it's sorely needed).

This translates to bad news on the job front. The CBO expects U.S. unemployment to average 10.2 percent in 2010, a more pessimistic outlook than it forecast in January. That means an additional 8 million people will be unemployed next year, according to the Center for Economic and Policy Research. The chart below shows the additional number of workers CBO expects to be unemployed from 2009-2014 because of the recession (click on chart to exand). It also illustrates the number of additional people who will have to settle for part-time employment, rather than returning to work full time.

This clearly has implications for financial firms. Industry pros are mixed on the question of how quickly the industry will recover. But for now, they acknowledge, times are tough.

About two-thirds of financial executives say business conditions are worse today in the sector than they were a year ago, with 30 percent expecting it to recover more slowly than the rest of the economy, according to a recent KPMG study. In their view, the biggest obstacles facing financial companies are managing risk (70 percent of respondents); finding new sources of revenue growth (57 percent); complying with regulations (44 percent); raising capital (44 percent); and restoring investor confidence (44 percent).

Chart courtesy of the Center for Economic and Policy Research

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