Prominent economist sees rosy days ahead

Tired of all the negative predictions about a jobless recovery, a sick global economy or a rerun of the sluggish 1970s? Then Michael Mussa is your man.

Mussa, the former chief economist of the International Monetary Fund, presented a decidedly upbeat economic forecast on Thursday that turned heads in the nation’s capital. Hardly a “Perma Bull” ? or perennial optimist ? Mussa’s cheery vision far exceeded the more cautious projections being voiced by mainstream forecasters.

“The recession is over and a global recovery is under way,” he began, unveiling a pile of data and historical charts to support his view that forecasters regularly underestimate recoveries ? and are doing so again.

Where the IMF foresees just 0.6 percent year-over-year growth in 2010 in the U.S. economy and 2.5 percent globally, Mussa sees 3.3 percent growth in the U.S. economy next year and 4.2 percent growth globally. He projects a U.S. growth rate of 4 percent from the middle of this year through the end of 2010.

“All forecasts tend to under-predict the recovery. … I think that’s what we are seeing this time,” said Mussa, now a senior fellow at the Peterson Institute for International Economics, a leading research organization in Washington.

So upbeat was he that the institute’s director, Fred Bergsten, joked that Mussa was forecasting the rebirth of a child named Rosy Scenario.

Mussa pointed to forecasts made at the end of the 1981-1982 recession, the closest approximation to today’s deep downturn. Like today’s crisis, banks in the early 1980s were sinking as home prices fell, mortgage lending was impaired, and consumers were distressed ? back then, because of soaring inflation.

The Reagan administration projected a growth rate from December 1982 to December 1983 of 3.1 percent, as did the Federal Reserve. In fact, the real growth rate turned out to be 6.3 percent.

Many economists, Mussa suggested, mistakenly believe that a troubled financial sector inhibits recovery.

“The general rule has been that it’s recovery of the economy that’s resuscitated the financial sector, not the other way around,” he insisted.

Mussa concurs with most mainstream forecasters that consumers won’t lead this recovery, and that Americans will sharply boost their savings to a 7 percent annual rate by the end of 2010.

What, then, will drive growth?

Business investment, Mussa said, noting that it has helped fuel recovery after past recessions. Investment in software and equipment has fallen 22 percent since the start of the latest recession, he said. Businesses should soon spend at a rate of about half of what they’ve cut in investment, he expects.

Government stimulus spending and a global recovery that’ll fuel demand for U.S. exports should help too, he said.

Unlike in the past, today there’s also the China factor. Nicholas Lardy, the institute’s expert on China, projects that the Asian powerhouse economy will grow by more than 8 percent this year and 9 percent next year. That’s a hungry market for U.S. exports.

“I do think it’s fair to say that China is leading the global economic recovery,” said Lardy, pointing to aggressive government spending on infrastructure and social welfare.

Chinese consumers aren’t burdened by the high debt of their U.S. counterparts, he said, and Chinese banks have benefited from having weak links to the global financial system, which still is in deep distress.

Are Mussa and Lardy right? On Tuesday Federal Reserve Chairman Ben Bernanke reminded an audience why forecasts should be taken with a grain of salt.

“Economic forecasting is not one of your more precise sciences,” he said, in an understatement not intended to provoke the laughter it received.

(c) 2009, McClatchy-Tribune Information Services.