ABA Convention: Economist sees many reasons for optimism

There is a one-in-three chance that the economy will slip into double dip recession, Moody's Analytics economist Mark Zandi told bankers Oct. 25 at the American Bankers Association convention in San Antonio. "The economy is growing; we are not in recession," he declared.. Many people perceive a recession due to a lackluster employment situation, Zandi said. The U.S. economy needs to create about 125,000 to 150,000 jobs per month to keep employment levels unchanged, given the number of people entering the workforce. In recent months, however, the economy has been adding only about half that number of new jobs, he explained.. Zandi said egregious policy errors have contributed to the country's economic troubles, and he said the country will only avoid another recession if it makes good policy decisions. Zandi said the near government shut down last spring over disagreements on the federal budget, and last summer's debt ceiling debacle significantly shook investor confidence in the U.S. economy. . Zandi said the Federal Reserve must remain aggressive in easing monetary policy. He said we can expect another round of quantitative easing and that there will be some inflation, due mostly to rising energy prices. He noted that Americans in the last 12 months spent $150 billion more on gasoline than in the previous 12 months, an amount about equal to the money people saved as a result of President Obama's 2 percent payroll tax credit.. Reduced government spending across the board will reduce the national GDP by about 2 percent this year, Zandi said. The congressional super committee that is attempting to reduce federal spending by $4 trillion in 10 years needs to succeed, he said, although he acknowledged that the odds of success are low. He said $1.2 trillion in cuts would be enough to be viewed as successful and at least $500 billion to $600 billion in cuts need to be identified to avoid recession.. Although the U.S. economy is "tied at the hip" to Europe's economy, Zandi said the economic prospects will look measurably better. "There is a view that America will be subject to a long no-growth period, like Japan, but I don't believe that.". Zandi said the economy has made a lot of progress in the last two years. American companies are very productive, even with 8.75 million fewer employees than they had three years ago. "That shows a huge increase in productivity," he said, predicting third quarter profits to come in at record levels.. American households also are stronger today than they were a few years ago. Zandi noted household debt is $1.2 trillion lower today than it was in August 2008, when it peaked. Household debt service obligation is, therefore, much lower than it was.. In the aggregate, Zandi called the banking system sound, with the only missing element for industry growth being loan demand.. "Dark pessimism is just wrong. I don't think it is appreciated sufficiently the progress that we have made," Zandi said. "The U.S. economy is very flexible. We are working through our problems quicker than other countries have in this situation."