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Wells Fargo's Silvia: U.S. Recovery Sustainable, but Below Trend

Interview with John Silvia, Wells Fargo

The United States will likely achieve sustained but below-trend growth over the next few years, according to Wells Fargo Chief Economist John Silvia, who shared his economic outlook during the Atlanta Fed's annual Banking Industry Outlook conference.

Echoing recent statements by Fed Chairman Ben Bernanke, Silvia told the audience at the March 1 event that the decline in unemployment has been stronger than one would expect based on economic growth. To sustain job gains, however, the economy will need to perform better, he noted.

"Long way" to labor market recovery
Initial jobless claims have declined "pretty dramatically" since 2010, indicating that recent job gains are sustainable, Silvia noted. From a cyclical standpoint, the labor market has seen a somewhat typical recovery, but from a structural perspective, "we've got a long way to go," he added. For one, many unemployed workers are unlikely to regain the types of jobs they had before. Construction workers are a prime example, as most job gains are occurring in such sectors as professional services and information technology, not construction, he explained.

Silvia also highlighted that, based on recent trends, the labor force participation rate has been declining for the overall U.S. population. When broken down by age group, the rate tells an interesting story, he noted. Participation rates for workers aged 55 and older have risen in recent years, while the rate for younger workers (16–24 years) has declined significantly. "Different groups are experiencing very, very different labor market [outcomes]," which helps explain some of the U.S.'s labor market challenges, he explained.

Consumer spending, another important economic indicator, has shown some positive signs as well. The household debt service ratio, which measures the ratio of debt payments to disposable personal income, has declined. "Many households have made the move to deleverage," Silvia said, suggesting that consumer spending is sustainable going forward. Further, rising petroleum prices will likely dent consumer spending, although he doesn't expect it to lead to another consumer retrenchment.

Housing demographics bring structural change
The housing sector weighs heavily on the economic outlook for the country, especially as bankers try to determine what a sustainable pace of housing starts is going forward, he said. Silvia noted that based on demographic trends, a rate of 1.2 million to 1.5 million starts a year is reasonable.

Silvia also highlighted a potential shift in the types of homes consumers will demand in the future. Although average household size has been falling over time, the median home size had continued to rise until the recession. But with higher gas prices, we may see fewer consumers looking for large suburban homes and instead opting for townhomes and cluster homes that are close to a city, he explained.

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