Economists see recovery on the horizon

January 22, 2009 6:15:39 PM PST
The string of bad news continues, and economists Thursday warned a turn-around may be another six or nine months away. The message from economists in Silicon Valley: patience.

Job layoffs, weak retail sales and falling home prices have created plenty of pessimism about the economy.

Now there is growing concern that the banking system may need more help -- after Bank of America received a $20 billion cash infusion last week, tied to losses when it acquired Merrill Lynch.

"It's definitely a reminder, a wake-up call that despite the injections of capital there's still a need to inject more capital into the banking system," Comerica Bank chief economist Dana Johnson said.

Johnson was in Silicon Valley to give his outlook to business leaders. Others share his concern.

"I hate to be the bear on this, but I think there's a new realization that has come back to haunt us, which is that we really have to fix this system all over again," New York Times reporter Andrew Ross Sorkin said.

It is a domino effect that has already hit the auto industry and now Silicon Valley and is spreading globally.

China Thursday said its economic growth slowed by 2.2 percent last quarter as exports fell and factories closed.

Still, Johnson, as well as Stanford University's John Shoven, is forecasting recovery towards the end of the year. Shoven thinks the stock market will stage a comeback even sooner.

"Once people realize this recession is not going to last forever, that unemployment is not going to go to depression levels, that in fact the economy will bottom and turn, you could have what I call a "buyer's panic," which is, 'uh-oh, I'm going to miss this big rally, I'd better get it,'" Shoven said.

Shoven also thinks the growing jobless situation could trigger health care reform.

"We've got a system where if you lose your job, you lose your health care; lots of people are losing their jobs, they're losing their health care, this is not a good system, we need to re-engineer it," Shoven said.

Even consumer spending could stage a come-back, once confidence is restored.

"I think people will do as they usually do and spend most of the money they earn," Johnson said.

Both economists think the U.S. will see a strong comeback, with growth of five to six percent later this year.

However, unemployment could remain high until companies are confident of a recovery.