A Glimpse at the Post-Recession Economy: A Structural Change Watch List

CHICAGO, May 8, 2009 — "Reality is hard to swallow, particularly when it is being played out on as large a stage as the U.S. economy. We have collectively come to realize that the gifts under our metaphorical Christmas tree come with a price tag – and interest, if those costs are deferred. The economy that emerges from recession will be an economy that is characterized more by its austerity than by its excesses," says Diane Swonk, chief economist of Mesirow Financial, in her May issue of Themes on the Economy.

In her May newsletter, Swonk examines the top 10 long-range or structural consequences of the financial crisis, and how they are likely to reshape the composition of growth in the U.S. for years to come, including:

• Financial regulation will increase. One of the most profound structural shifts will be the rewriting of the regulations that frame our financial markets. The problem is that no one seems to be discussing what the end game should look like.
• Globalization will slow, but not reverse. The global recession has reversed the pace at which countries interact with each other via trade. Populism and the backlash to protectionist policies by our trading partners will only exacerbate those trends in the near-term.
• The federal budget deficit will widen. Everything from the costs associated with the recession (e.g., reduced tax revenues, stimulus package, unemployment insurance, food stamps, and medical care) to the ongoing conflicts in the Middle East is expected to increase the size of the federal deficit over the next two years.
• Productivity growth will reaccelerate. Massive job cuts, coupled with increased pressure to improve profits, and the onset of another phase of the technological revolution all suggest that productivity growth will accelerate. The only question is: when?
• Inflation will supplant deflation. A heavy reliance on fiscal and monetary stimulus suggests that inflation will eventually reaccelerate. Increases in productivity growth may postpone but can't reverse those trends.
• The income gap will narrow. Everything from the recession, which has knocked many of the wealthiest households out of the top income strata, to the spread of productivity growth across more industries should help to narrow the gap between the wealthiest and poorest of households.
• Diplomacy will play a larger role. President Obama has already shown a willingness to engage in more diplomacy than the Bush administration when it comes to the Middle East.

"The result will be a massive restructuring in the U.S. economy from a reliance on consumer demand to a reliance on investment and foreign demand. The pain with which that transition occurs will depend heavily on how quickly policymakers start making major changes today," concludes Swonk.

The May issue of Themes on the Economy, as well as archived issues, can be found at www.mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with $31.4 billion in assets under management and more than 1,100 employees in locations across the country and in London. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For the fiscal year ended March 31, 2008, the firm posted $492 million in revenue, with more than $246 million in capital. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.

The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc., © 2009, Mesirow Financial Holdings, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s).

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