>North America: no longer driving the world, but still key to the global outlook

The U.S. economy definitively turned up in the third quarter, with growth initially reported at a 3.5% pace. Revisions have brought this growth down to 2.8%, but it remains on the surface a satisfactory start to a new expansion.

Unfortunately, this incipient recovery is being driven by temporary forces: a combination of fiscal and monetary stimulus, assisted by the beginning of a turnaround in the inventory cycle. Only if these succeed in jump-starting the normal processes of growth in incomes and spending, can the recovery persist for long; and so far there is a critical missing ingredient: jobs.

United States: Recession over, but still waiting for jobs

We continue to believe that employers, who fired workers at an unprecedented pace in the recession, will find that they need to start hiring again as soon as sales pick up even a little. Job market indicators show some improvement, but so far they haven’t added up to gains in total employment. Time is of the essence in re-starting the economic engine, and without jobs the recovery could sputter out. Given the headwinds facing the economy as consumers and banks try to rebuild their balance sheets, there is a real risk that if growth doesn’t accelerate soon, it may actually fall back into a “double-dip.”

Our base-case forecast calls for job gains around the end of 2009, feeding into moderate growth that picks up speed gradually over the course of 2010 and 2011. In this scenario, consumers maintain but don’t increase their saving rate, and the financial system finds ways to keep just enough credit flowing to support a modest expansion. Unemployment declines slowly, but is still over 8% in 2011. Faster growth is entirely possible, given the amount of slack in the economy and the potential impact of pent-up demand for consumer durables and business equipment, but the greater risk seems to be to the downside. The history of financial crises and the associated recessions is not encouraging for those who bank on a rapid pace of recovery. Unprecedented policy measures have averted a much worse economic collapse, but it will take unprecedented insight and timely action going forward to avoid a long and arduous recovery.

To read the full report: ECONOMIC OUTLOOK