Economic growth will pick up next year and even more after that as headwinds standing in the way of a stronger recovery begin to abate, former Federal Reserve Vice Chairman Donald Kohn told the Urban Land Institute in Washington, D.C. on Oct. 15.

Painting a picture that was not entirely rosy, “we are in for a slow climb out of a deep hole with inflation remaining low for some time into the future,” said Kohn, who is currently a fellow at the Brookings Institution.

Among the challenges still facing the economy, he said that lending requirements remain stringent and borrowing is very tight for small businesses and households; it will still take time to work through the overhang of housing from foreclosures, short sales and the shadow inventory; and the economies of major industrial trading partners of the U.S. are still hurting.

He added that home prices seem to be stabilizing and some parts of the country have worked through their overhangs.

Households are also still in the necessary process of repairing their balance sheets, he said, pushing the savings rate from 1% to 6% of current income, reducing consumer spending. Savings may go up a bit more, he said, but not as much as over the past couple of years, and that should put households in a “more comfortable position with their assets and debt” in the period ahead.

“This is a difficult cycle,” he said, and “not a garden variety recession.”

History has shown that recoveries from recessions precipitated by a banking or financial crisis, as the recent downturn was, are slower than normal, said Kohn. “A return to sustained above-trend growth in 2011-2012 would be faster than other recoveries from financial crises.”

Kohn questioned how much more the government can do to speed up recovery.

“This is a textbook situation where you would want a fiscal policy” to increase public spending to make up for deficient private demand, he said. However, there is “widespread skepticism in the political system about the effectiveness of short-term stimulus,” he said. It may be true that things would have been far worse without government stimulus, but the impact of that spending is difficult to measure, making it hard to argue in its favor.

A bigger obstacle to even more short-term stimulus, however, is that there is no long-term plan for dealing with the budget deficits, he said. “We don’t have a long-term plan, constraining the ability to have short-term stimulus.”

On the monetary side, he observed, at the same time as Fed Chairman Ben Bernanke devised a stimulus plan, he also planned a long-term exit strategy for when the economy recovered.

Kohn predicted that a deficit-reduction plan will eventually emerge, with compromises on both the tax and spending sides.

In the meantime, monetary policy can help and Kohn said that Federal Reserve purchases of long-term Treasury bonds would produce a rise in equity prices and a decline in interest rates. “Purchases do support asset powers by more than the market would do on its own, inducing people to take on more credit and interest-rate risk than otherwise,” he said.

But there are some negatives to this approach, as well, he pointed out. The benefits are not easily calibrated and “we are in uncharted waters.” Also, “if you don’t know you will have a job, lower interest rates won’t be an inducement to buy a car.”

The Fed’s Open Market Committee “will have a vigorous debate over this in November,” he said.

On the inflation front, Kohn said that the core Consumer Price Index is around 1% now and should stay quite low for several years, drifting slowly higher toward the Fed’s target rate of about 2%. He said that deflation was unlikely. However, inflationary expectations, which have been running about 2%, have helped to keep inflation from falling further. If those expectations go down, inflation could slow even more.

Register for Fall Construction Forecast Conference Webinar on Oct. 27

The Fall Construction Forecast Conference (CFC) Webinar will feature three distinct perspectives  on the housing industry and its near- and long-term future. The webinar will be held from 2:00-4:00 p.m. EDT on Wednesday, Oct. 27.

Speakers David Crowe, NAHB chief economist; Eric Belsky, managing director of Harvard University’s Joint Center For Housing Studies; and Maury Harris, managing director and chief U.S. economist at UBS, will present the latest economic data and opinions in a streamlined, efficient format that will enable attendees to interact directly with them.

The fee is $29.95 for NAHB members and home builders associations and $49.95 for non-members.

To Register

For more information and to register, visit www.nahb.org/cfc.

Visit NAHB’s ‘Eye on Housing’ Blog for the Latest Economics and Housing Policy News and Analysis

Housing and economics followers can get the latest economics and housing policy news, analysis, studies, charts and graphs from NAHB’s free new blog, “Eye on Housing,” at http://eyeonhousing.wordpress.com.

Featuring NAHB Chief Economist David Crowe, as well as observations and comments from NAHB economists Bernie Markstein, Paul Emrath, Robert Dietz, Peter Grist and Robert Denk, the blog also includes links to relevant housing stories and information from other news sources.

Blog entries will be updated on a regular basis as the news related to housing occurs. The blog also will replace the content in NAHB’s Eye on the Economy. While subscribers will still receive their regular issues of Eye on the Economy, the e-newsletter will serve primarily as a digest of the content featured on the "Eye on Housing" blog.

Readers can either visit the free blog directly at http://eyeonhousing.wordpress.com, or subscribe to the RSS feed on the blog to have the latest entries sent to them as they are posted.

Want to Know Your State’s Starts Forecast for 2010-2011?

Find out in HousingEconomic.com’s State Starts Forecast (sample).

The forecasts include downloadable Excel tables of total, single-family and multifamily starts by region and state.

To learn more, visit www.housingeconomics.com.