As has been widely observed in recent weeks, there are signs that the rapid decline in economic activity of the past few quarters is slowing. The latest data give some reason to hope that we are approaching a bottom in economic activity and that growth will resume later this year. Yet stabilization or improvement would begin from very low levels compared with those that prevailed in recent years. Recovery may be painfully slow, and the economy will remain unusually vulnerable to new shocks.

[I]t is always a challenge to pinpoint when the economy will transition from recession to recovery and to the expansion beyond.
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In my view, the steep decline in our economy has begun to moderate, and I expect sales and production to begin to recover, although gradually, during the second half of the year. Currently, a lot of attention is focused on the date when this recession will end, but not enough attention is being paid to how much ground we will have to cover before we return to our pre-recession level of economic activity.

Once the recession ends, we may be tempted to hope that the economy will take off at a full gallop, but that is not likely to happen because of some long-standing imbalances within our economy. Addressing these imbalances may result in a slower, lengthier recovery period, but doing so will increase our ability to achieve sustainable economic growth over the longer term.

We continue to expect overall economic activity to bottom out, and then to turn up later this year... An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall.

My view of the more immediate outlook for the U.S. economy is that we will emerge from this recession - perhaps as soon as the second half of the year, but most likely in early 2010, as many economists project.

After two quarters where real GDP shrank by more than 6 percent, I expect that the economy will contract by much less than that this quarter, and that we will begin to see positive growth – perhaps by the end of the year.
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With significant growth in payroll employment unlikely until next year it will obviously and unfortunately be some time before we see labor markets return to what we think of as “full employment.”  And it is too soon to know when the trough of the recession will occur, although there are hopeful signs that we are nearing it.

Thus, while forecasting in the current environment is tricky, many forecasters, myself included, expect the second quarter of this year to exhibit a less severe decline in real GDP. Yet, I remain relatively optimistic and expect positive but modest growth in the second half, making fourth-quarter to fourth-quarter real GDP growth only slightly negative for 2009.

I am also relatively optimistic about growth next year. In fact, since January, I have not changed my growth forecast for 2010 or 2011. I expect the recovery to gain traction in 2010, with growth picking up to about 3 percent and then settling down to its long-run steady state of about 2.7 percent in 2011.

The sharp rise in the unemployment rate in the first few months of 2009 and the steep declines in payroll employment have led me to revise upward my unemployment rate forecasts. I expect the unemployment rate to peak sometime early next year above 9 percent, before falling gradually.

Under these conditions, I envision a slow recovery. Not a V-shaped snapback—nor even a U-shaped one—but a very slow slog as we find a more sensible and sustainable mix between consumption and savings and investment.

You know the numbers that have been reported for the nation for the first quarter: Even after upcoming revisions, I venture we’ll find we contracted at somewhere between 5 and 6 percent at an annual rate. The pace of decline will moderate in the current quarter, and then we’re likely to bounce along the bottom for a while, perhaps punching through to positive growth as 2010 dawns. I would be delighted, but surprised, if meaningful sustained growth gets under way any earlier. Regardless, increases in unemployment, while mitigated by the expansion of government (particularly the need for census takers) will likely take us to a 10 percent jobless rate before we reverse course. And global excess capacity is likely to remain excessive for some time to come.

Most prominent forecasters expect the recession to end later this year, and I believe that is a reasonable view.
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A set of improving indicators coming from the housing market provides further reason to believe the recession will end by year-end.

Looking forward, my personal forecast for output growth is similar to the Blue Chip consensus. I believe the most likely scenario is that real GDP will advance at a low, but positive, rate in the second half of this year followed by trend-like growth in 2010. A forecast that the economy will soon switch from contraction to expansion strikes some people as optimistic. But, it takes less than you might think for real GDP growth rates to turn positive. Positive growth becomes likely if some of the economy’s weak sectors stop dragging down GDP going forward.

I’ve spent the last year or so being so downbeat that I could actually see the faces in my audiences sink as I spoke. The fact that I can now talk about crosscurrents may mean that the economy is reaching an inflection point. It’s too soon for me to be convinced of that, and I see a lot of downside risk, but at least there is some basis for optimism. That said, I expect the recovery, whenever it does begin, to be quite gradual compared with those following previous deep recessions.

Once the economic recovery begins, the pace of the expansion is likely to be subdued for a time. There is historical precedent for this, since the recovery of the early 1990s was initially quite modest, as was the recovery earlier this decade. More importantly, in view of the state of the credit markets, it seems a fair bet that it will take time for momentum to build. But with the passage of time—as we get into the middle of 2010 and beyond—I would expect to see a resumption of healthy growth.

However, the recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing.

"I think it will take us most of the rest of the year," to move out of recession, Hoenig said.

As reported by Reuters.

"We will see a less severe rate of decline in the second quarter, and I am hopeful that we will see some positive growth in the second half of this year," Federal Reserve Bank of St. Louis President James Bullard said.

"We've had two very negative quarters," he said, adding, "I think the economy will naturally return to its balanced growth path. The question is how fast it will return."

As reported by Dow Jones Newswires.

[M]y best guess is that we are in for a relatively gradual recovery, though a very wide range of uncertainty surrounds that outlook.
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Although the recovery in the U.S. economy is likely to be gradual in its early stages, it should gain momentum over time. As credit markets improve, the accommodative stance of monetary policy will show through more clearly. And a rebound in confidence about the future should help spur demand. As demand strengthens and financial markets improve, some of the adverse feedbacks should reverse and begin working to bolster activity. In time, as these forces come into play, economic growth will pick up, ultimately returning the economy to its full productive capacity and bringing the unemployment rate down to a more normal level.