CRS – Rebuilding Household Wealth: Implications for Economic Recovery – Craig K. Elwell, Specialist in Macroeconomic Policy, September 13, 2013

“The pace of economic recovery from the 2007-2009 recession has been historically slow. Over four years of recovery, the annual rate of growth of real gross domestic product (GDP) has averaged 2%, well below the 3% to 5% typical of other post-WWII recoveries. As a result, the output gap—the difference between what the economy could produce and what it actually produced—has only declined from a high of 8.1% in mid-2009 to a still large 5.8% in mid- 2013. Slow growth of output has translated into a slow reduction of unemployment. The recovery has persisted, in part, due to support to aggregate spending by policies of fiscal and monetary stimulus. However, fiscal stimulus has steadily dissipated since 2010 and in 2013 the federal budget has turned contractionary. While monetary policy is expected to remain stimulative through 2013, it is unlikely to add to that stimulus to counteract the increasing drag of falling federal budget deficits on economic activity. Therefore, sustaining the recovery’s momentum in the remainder of 2013 and into 2014 may require a greater push from private spending, particularly household consumption spending. In the aftermath of the 2007-2009 recession, which involved a substantial loss of net worth and increase in the burden of debt, households’ actions to repair their severely damaged balance sheets by reducing debt and building wealth is thought by many economists to be a key factor dissipating the strength of consumer spending. Although this repair is necessary for building a stronger economy in the long run, it has slowed the economy-wide recovery and job creation in the short run.”