The Black Hole in America’s GDP

CAMBRIDGE – The massive downturn in American’s economy will last longer and be more damaging than previous recessions, because it is driven by an unprecedented loss of household wealth. Although the fiscal stimulus package that President Obama recently signed will give a temporary boost to activity sometime this summer, the common forecast that a sustained recovery will begin in the second half of 2009 will almost certainly prove to be overly optimistic.

Previous recessions were often characterized by excess inventory accumulation and overinvestment in business equipment. The economy could bounce back as those excesses were absorbed over time, making room for new investment. Those recoveries were also helped by interest rate reductions by the central bank.