The American economy remains in a highly uncertain state with very significant risks to the downside. Weak employment statistics, contracting credit, diminishing confidence, likely further declines in housing prices, and a slowing global economy all place negative pressures on the US economy. While strong exports, declining commodity prices, and yesterday’s actions to shore up the housing finance system are welcome developments, the preponderant probability is that we are a year or so away from a resumption of strong economic growth.
Even after the downturn ends and growth resumes the economy will be producing output significantly short of its potential. Experience in the United States and abroad suggests that downturns associated with asset price collapses and financial sector problems such as the one we are now experiencing tend to be especially protracted. Moreover, unemployment typically continues to rise well past the business cycle troughs with peak levels of unemployment occurring as in the last cycle as much as two years after recessions end.
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