Checking the Economy's Pulse

Signs Point to Slow Recovery From Crisis; Some Note Innovation Can Spring From Adversity

By DAVID WESSEL

Bloomberg News

A worker at boat maker Nautic Global's factory in Elkhart, Ind., welds an end cap onto a pontoon. The economy is improving, but the effects of the crisis are hard to gauge.

The U.S. economy is recovering slowly from the financial heart attack it suffered in 2008. Like a middle-aged man talking to his doctors, it now asks: When will I feel like myself again? Will I ever get back to normal? Will it be soon?

Things are getting better. The U.S. economy has been growing since the middle of 2009, something that can't be said of the euro zone, the U.K. or Japan. Yet it still has a long way to go. Economic physicians aren't sure when, if ever, it will be as vigorous as it was before. It probably won't be this year.

Output of goods and services per person hasn't returned to prerecession levels, and probably won't get there until the end of 2013. The latest government tally found 4.2 million fewer jobs than four years ago. Economists surveyed by The Wall Street Journal say the unemployment rate, now 7.7%, won't be back to 5.5% before 2016.

Lurking beneath the short-term prognosis are bigger questions: Did the financial crisis do long-lasting harm to the economy's muscle? Has it slowed growth in productivity, or output per hour of work, the magic elixir of rising living standards?

There are worrisome signs.

One is a gauge closely watched by the Federal Reserve as it tries to discern the pace at which the economy can safely grow over time without generating inflation, known as its potential for growth. A rule of thumb holds that unemployment generally falls by half a percentage point for every percentage point of growth above the long-run trend.

"The fact that unemployment has declined in recent years despite economic growth at about 2% suggests that the growth rate of potential output must have recently been lower than the roughly 2½% that appeared to be in place before the recession," Fed Chairman Ben Bernankesaid in a November speech.

A percentage point may not sound like much, but it adds up over time. At 2% a year, a $50,000 household's income grows to $82,000 in 25 years; at 2.5%, it gets to $93,000.

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Mr. Bernanke cataloged the reasons why the past few lousy years might have lingering effects: So many workers have been sidelined for so long they may never go back to work. Business investment declined sharply during the recession, leaving firms and workers less to work with. Individuals, businesses and investors may be so shaken that they will take fewer of the risks that produce efficiencies, new companies and new ways of doing things.

He sounded pretty glum. After all, the U.S. has consistently defied Fed forecasts that growth will perk up. Maybe this isn't temporary.

But suddenly Mr. Bernanke pivoted, looked ahead and predicted confidently that "the effects of the crisis…should fade as the economy heals." The pace of growth will vary with the ups and downs of the business cycle, of course, and with demographics, but he sees no reason to believe that the pace of economic growth and technological progress has taken a big, permanent downshift from the prerecession trend because of the crisis.

This isn't an academic indulging his curiosity. In deciding how much monetary medicine to give the economy, the Fed relies, in part, on measures that compare the actual output of the economy to its potential. Overestimating the potential for growth can lead the Fed to overdose the economy and generate unwelcome inflation, as it did in the 1970s.

Mr. Bernanke and like-minded economists draw comfort from economic historian Alexander Field's work on the Great Depression, which he calls "the most technologically progressive decade of the century." Amid all the pain, he argues, came long-lasting innovations in products, production processes and transportation, some forced by the imperative to cope with adversity. "It was the expansion of potential output during the Depression, largely unappreciated because it took place against a backdrop of double-digit unemployment, that laid the foundation both for successful war mobilization and for the golden age that followed," writes Mr. Field, of Santa ClaraUniversity in California.

Will we look back at the 2010s and see something similar? Perhaps. Mr. Field calls himself "agnostic."

There are bleaker views.

One holds that the credit arteries of the economy are still blocked and that well-intentioned but counterproductive government policies are prolonging the pain in housing and elsewhere. The resulting stretch of very slow growth will be so long it will seem almost permanent.

Another argues that a slowdown in growth began to infect the economy before the financial crisis, but economists didn't realize it at the time. Largely for this reason, Fed officials have shaved their long-term growth forecasts. In early 2011, they put the long-term U.S. growth rate at 2.5% to 2.8%. Now they expect 2.3% to 2.5%.

Yet another camp questions whether personal computers, cellphones and the Internet, for all the hoopla, will prove as economically significant to the way Americans live, shop and work as electricity, air conditioning and airplanes.

"What happened to the future?" asks Peter Thiel, co-founder of PayPal. "We wanted flying cars; instead we got 140 characters."

Write to David Wessel at

A version of this article appeared January 2, 2013, on page A7 in the U.S. edition of The Wall Street Journal, with the headline: Checking the Economy's Pulse.

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