An optimist makes a case for a stronger recovery

James Bullard, president of the St. Louis Federal Reserve Bank, told them he thinks the U.S. gross domestic product will grow 3.5 percent next year. While that's above average, it might not sound exceptional to an uninformed listener.

These students, though, have studied finance. They were attending a Monday event sponsored by the Missouri Council on Economic Education, and they may have been savvy enough to recognize the limb that Bullard was climbing out on.

He was saying that the economic recovery is about to start feeling like a real recovery. Growth of 3.5 percent would be a noticeable step up from last year's 2 percent reading, and from the similar or lower number that we'll get this year.

Bullard's forecast puts him at odds with most private-sector economists. Three other forecasters who joined Bullard at Monday's program said the economy remains stuck at a growth rate of just over 2 percent.

Bullard was, he admitted, too optimistic heading into 2011 and 2012. “We expected a faster rebound” from the recession, he said. “There have been drag factors, primarily housing and the situation in Europe.”

Now, housing is showing signs of recovery, and the European Central Bank seems committed to keeping the continent's banks afloat, no matter how many bailouts the Spanish and Greek governments need.

Bullard didn't offer a specific forecast for unemployment, but he said the rate “will continue to tick down.” He noted that the drop from 9.1 percent a year ago to 7.8 percent now “is actually a tremendous amount of improvement in unemployment in one year.”

Edward Leamer, an economic forecaster at UCLA, told the students he thinks unemployment will be at 8 percent in late 2013, slightly higher than today. His presentation was a pessimistic one that focused on structural factors, and he said the Fed's three rounds of bond-buying stimulus are not helping the economy.

“If you've had your third dose of leeches and it isn't working, then maybe you have a different disease,” Leamer said. His diagnosis is a “workforce development problem” that starts in the schools.

“The assets that used to create value in an earlier world are not so valuable anymore,” Leamer said. “That's creative destruction. We still have an educational system that's rooted in the 20th century industrial world, and no asset takes longer to develop than human capital.”

Kate Warne, an investment strategist at Edward Jones, says she sees the economy remaining “lukewarm, neither hot nor cold, just a continuation of modest growth.” She predicts that unemployment will still be at 7.8 percent a year from now.

Jeff DeAngelis, of Milwaukee-based Mason Street Advisors, had the weakest GDP forecast among Monday's four panelists. He thinks the economy will grow just 1.2 percent in the next 12 months, and will be stuck at 2 percent or less for at least a couple of years.

For three straight years, pessimists like DeAngelis and Leamer have been right about the economy, and optimists like Bullard have been wrong. The students must have been paying attention.

In an instant mobile-phone poll on Monday, they were asked where the unemployment rate will be a year from now. The majority voted for “unchanged.”