If the national economy can make it through the next six to 12 months without sliding back into recession, we should see a return to much more solid growth in 2012 and 2013. But that’s a big if says Mark Zandi, chief economist at Moody’s Analytics and cofounder of Moody’s Economy.com.

Zandi outlined his short- and mid-term economic forecast to more than 450 business leaders attending CBIA’s 195th annual meeting in Hartford on Tuesday. One of the preeminent economists in the country, Zandi has served as an advisor to national policymakers and is an influential source of economic analysis for businesses, the media, and the public.

[See video coverage of Zandi's presentation: Part 1 | Part 2 | [Part 3 | ]

Trouble in Europe Stalled Growth Here

At a 2% annualized rate, economic growth as measured by GDP is tracking well below its estimated potential, said Zandi, not fast enough to “grow jobs or even forestall further unemployment increases.” The likely result is that unemployment will get worse—edging back into the double digits—before it gets better.

One reason for the lower-than-expected growth rate is the debt crisis in Europe, which drove the stock market down by 15% last spring and early summer.

“The European debt crisis sideswiped us,” said Zandi, adding that businesses households are sensitive to fluctuations in the stock market and are less likely to engage in economic activity when the market is sending negative signals and people see their nest eggs shrinking.

Zandi also attributed sluggish growth to the end of federal stimulus programs, which, he says, were critical in ending the recession because they “brought an end to the freefall.”

Near Term: Touch and Go

“The next six to nine to 12 months are going to be uncomfortable,” said Zandi, pointing to the overall fragility of the economy. “We’ve got some issues to work through.” In fact, he puts the odds of a double-dip in the coming months at one in three.

One cause for concern is that hiring is at a record low rate, primarily, said Zandi, because business-formation rates are also at a record low, and “business formation is critical to hiring.” Tight credit, he said, is also responsible for companies’ unwillingness to engage in any significant hiring.

He also cited a persistent lack of consumer and small-business confidence and the mortgage foreclosure crisis as reasons economic growth won’t pick up until 2012. He expects home prices to decline further, which will make it more difficult for small businesses to get financing because many small-business owners put their homes up for collateral. As home prices continue to drop, said Zandi, small businesses will “have difficulty getting credit, and the job machine won’t get going.”

Mid-Term Prospects Brighter

If the economy can get through 2011 without a major hit, Zandi is much more optimistic about the prospects for a return to robust growth and lower unemployment. He forecasts a 5% growth rate as measured by GDP by 2012 and does not see inflation becoming a major problem.

Zandi’s optimism is grounded in several factors, among them is the strong possibility that the Federal Reserve will reengage in quantitative easing beginning in November. That means the Fed will inject large amounts of money into the economy by resuming large-scale purchases of securities.

Zandi believes that Fed action will result in a measurable increase in GDP and jobs created. He also noted that because businesses have done a “marvelous job reducing their cost structures,” large and midsize firms’ are now highly profitable and their balance sheets are strong.

“It’s no longer a question of whether businesses can expand, but are they willing,” said Zandi. He predicted that once one CEO in each major industry decides to change focus from cutting costs to increasing revenue, others will follow and business expansion and hiring will ensue.

Zandi also believes that the trend among households to deleverage—to reduce their debt loads—is making strong progress and is cause for optimism.

“We’re righting the wrongs that got us into this mess,” he said. “Household liabilities have fallen by about $1 trillion over the last two years.” Once the deleveraging process is complete, consumers will begin spending again, in part, due to the pent up demand that has been developing during the deleveraging process.

A Question of Confidence

“If my optimistic perspective on the outlook will come to pass, a number different working assumptions have to hold,” said Zandi. “The first is that we have to continue to make a reasonably graceful transition from an economy led by consumers to an economy that’s led by exports and business investment. I think we’re up to this challenge.”

Zandi predicted that we’ll continue to export the things that we already export—including aerospace, machine tools, pharmaceuticals, and agricultural products. But we’ll also need to export services—accounting, legal, management consulting, engineering, architectural, and others—all of which, he said, we do extremely well.

“These services embody what is our nation’s competitive advantage,” said Zandi. “It’s our highly skilled and educated workforce, and nowhere is that more obvious than in the state of Connecticut.”

The other working assumption Zandi believes will have to hold in for the economy to come back is that Washington and state governments will address their fiscal crises.

“You’re going to say, ‘Oh, we’re doomed’,” Zandi quipped, “But I think just the opposite…If there’s a problem anywhere in the world, global investors come to invest in the United States, because they know that when push comes to shove, we always figure out what to do, and we do it.

“Everyone has confidence that we’ll do it, except perhaps ourselves. But I think we will be able to get it together. Our [fiscal] problems aren’t quite as daunting as you think they are…and there are some pretty straightforward things you can do both on the spending side and on the tax side to get it together and make sure that my optimistic outlook for the U.S. economy comes to pass.”

Closer to Home

During a brief question-and-answer session, an attendee asked Zandi for his thoughts on how to close Connecticut’s massive budget deficits and reduce billions in unfunded liabilities. Zandi acknowledged that he did not know enough about the state’s situation to offer specifics, but he did offer broad recommendations. First, he called upon policymakers to be bold, “to be extremely aggressive with respect to the fiscal situation.”

He also suggested that fiscal matters are going to turn out “much better than anticipated” and that the state will get a lot of help from the revenue side when the economy picks up in 2012.

Zandi cautioned, however, that when that upswing occurs, the inclination will be to not tackle the big problem—the approximately $60 billion in unfunded liabilities for state employee health and retirement benefits. He said that in 2012 and 2013, when the state’s revenue stream has improved and the economy is better, that’s the time to tackle the unfunded liabilities.

Zandi was also optimistic in response to a question about the decline in manufacturing in Connecticut. If you survived the recession, he said, “you will have the wind at your back,” because emerging economies all over the world will want to buy what you produce.

He warned, however, that there’s no guarantee that manufacturing firms will choose Connecticut over other states as a place to locate or expand, which is why any solutions to the state’s fiscal problems should focus more on reducing government spending rather than raising taxes.-- Bill DeRosa

Bill DeRosa is editor of CBIA News. He may be reached at bill.derosa@cbia.com.