U.S. Economy May Grow as Much as 4% Next Year, Blinder Says

By Stephanie Phang

Dec. 16 (Bloomberg) -- The U.S. economy may expand 3 percent to 4 percent next year, supported by a recovery in investment, job creation and fiscal and monetary stimulus, Princeton University economist Alan Blinder said.

“The U.S. economy is digging itself out of a deep hole,” Blinder, who served as the Federal Reserve’s vice chairman from 1994 to 1996, said in a Dec. 15 article that appeared on the Wall Street Journal’s Web site today.

Business investment remains 20 percent below the 2008 peak and is likely to increase as plants and equipment age, he said. Home building, currently at less than half the level in 1960, can only improve, while companies will stop reducing inventory at near-record rates as sales rise, he said.

Companies that slashed payrolls during the recession will also need to hire more workers as sales and production recover, Blinder said, predicting that net job creation may resume in a month or two.

More than 70 percent of a February $787 billion fiscal stimulus is yet to be spent, and the central bank’s interest- rate cuts, whose impact was muted by blocked “credit-granting arteries,” will flow to the economy as credit markets heal, Blinder said.

Still, “serious downside risks remain,” Blinder said. The investment rebound and fiscal stimulus will fade in 2010, consumer finances and confidence are “shaky,” banks are failing and commercial real estate is “a mess,” he said. That will prevent the economy from surging as much as it typically does after a deep recession, such as the 7.7 percent pace reported in the six quarters after the 1981-82 slump, he said.

To contact the reporters on this story: Stephanie Phang in Singapore at sphang@bloomberg.net