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12-2010 News
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Chicago Economists Predict Growth Could Exceed Consensus View

Home prices will remain near their current levels for the next few years, but the U.S. economy could grow faster in 2011 than the consensus forecast shows, according to predictions made during the annual business and economic forecast luncheon of the University of Chicago Booth School of Business.

“We will not see a recovery in housing prices in the near term, nor do I expect home prices to drop further,” said Erik Hurst, a professor of economics at Chicago Booth and one of the speakers at the event Nov. 30 at the Sheraton Chicago Hotel. “That is my take-it-to-the-bank prediction for 2011.” Economic growth in the U.S. next year, as measured by the change in GDP, could reach 3.4 percent and exceed the consensus view of most economic forecasters, said Randall Kroszner, who served as a governor of the Federal Reserve System from 2006 to 2009.

“The productive engine of our economy is not broken,” Kroszner said. “Business productivity growth has been very high and firms have continued to invest rapidly in equipment and software.” In addition, he said, consumer spending is recovering, although not as robustly as hoped.

Recent quantitative easing by the Fed will serve as insurance against downside risks to the economy, he continued. “Monetary policy can produce the necessary conditions for job growth, but only the choices of business people can create jobs.”

He predicts job growth will remain sluggish in 2011 due to uncertainty over the government’s policy and the current budget trajectory. “Tremendous uncertainty about what taxes will be on investment by both large and small firms, combined with uncertainty about future health care costs, has so far made businesses reluctant to hire workers on a permanent basis.”

Hurst believes consumption growth during the recovery and, as a result, economic activity as a whole, will be slower than previous recessions because households will try to build up savings and wealth rather than focus on spending. “During the boom years, people misallocated their earnings toward consumption and are now beginning the process of deleveraging their balance sheets,” he said. He predicts unemployment will still be above 8.5 percent a year from now, a small improvement from the current 9.6 percent.

  
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