A look back, a look ahead.

Unemployment under 3 percent and a surge in new jobs and population as people sought to experience the economic boom — that was Orlando in 2006. The housing boom peaked later that year, and the economy began to slow. Fewer jobs were being created and unemployment rose slightly, but all was still OK.

Then the boom turned to bust, followed by a crash.

Problems in the local economy were amplified by the financial panic hitting the national and global economy. Since then, Orlando has lost more than 90,000 jobs — 8 percent of its total. Florida has lost more than 700,000 jobs — almost 9 percent of its total — and unemployment rates of about 3 percent both locally and statewide rose to about 11 percent statewide and 11.5 percent in Orlando — the largest increases since the 1930s.

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A Year to Remember (or to Forget)

As the economy emerges from the worst recession since the Great Depression, it’s important to look ahead to this coming year. Many are hopeful that the worst is behind us and look forward to renewed economic growth. Others fear that we still have many significant problems and that true recovery may be a long way off.

To understand the likely path of the economy, we must first look back on what many are calling the Great Recession.

The recession, which began in December 2007, was relatively mild during its first nine months, though problems were building. In September 2008, Lehman Brothers went bankrupt, and a financial panic ensued. Other major financial institutions across the world were on the brink of collapse, putting the entire global financial system at risk — an unprecedented event in modern times.

Although this was the first financial panic to hit the United States since the 1930s, they were common occurrences in the past, taking place about every 15 to 20 years, between 1819 and 1930. A common theme of these panics was that most resulted from speculative excesses and were followed by long, severe recessions. Because few around today had experienced such an event, and the financial system today is significantly more complex than it was in the past, there wasn’t a playbook to follow, and decisions had to be made very quickly to prevent the unimaginable from becoming reality.

The next six months saw the most severe global recession since the Great Depression, leaving few countries unscathed. By most measures, credit became tighter than at any time since 1932. Globally, many small to midsized firms could not establish creditworthiness, contributing to the largest collapse in international trade since 1930. The U.S. stock market, as measured by the Dow Jones Industrial Average, experienced its biggest decline since 1931. There was realistic concern that we might experience a second Great Depression. While controversial, many of the U.S. government’s policy decisions prevented a financial meltdown, though a severe recession came about. Central banks around the world, led by the Federal Reserve, took extraordinary steps to stabilize the financial system. Governments engaged in more fiscal stimulus than at any time in history.

By March of this year, the financial system had begun to stabilize, and the economy appeared to have bottomed out in the summer. However, the damage was significant. As of September, the United States had lost 8 million jobs (based on preliminary revisions to be made official in the January 2010 employment report), 5.8 percent of the total; U.S. GDP fell more than at any time since World War II (nearly 4 percent from its peak). Prices declined by more than 2 percent — the most deflation since 1950 — and credit delinquencies and foreclosures hit record highs.

The damage wasn’t limited to the United States. Mexico suffered its worst recession since 1932 while Japan, Germany, the United Kingdom and other countries experienced their worst recessions since World War II.

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The Year to Come

The economic hurricane has passed, and the economy has begun to stabilize. Yet, it still faces many headwinds. Consumer spending is likely to remain sluggish, and businesses are unlikely to expand until there’s a significant increase in demand. As a result, unemployment is likely to remain stubbornly high and inflation will be subdued. Unemployment in both Orlando and the rest of Florida will remain in the double digits throughout 2010, as the local economy slowly begins to get back on its feet.

To get a complete picture of what’s likely to come, it’s important to examine key components of the economy:

Consumers (different design header treatment from regular subheads)

Although the economy seems to have hit bottom, the recovery is likely to be sluggish. Consumers are still struggling with heavy debt loads, in addition to which many having lost their jobs. Income growth will remain anemic as long as unemployment remains high. The stock market has bounced back strongly since March 2009, but it remains about 30 percent off its high. Housing prices have begun to stabilize, but homeowners have considerably less home equity than they had a couple of years ago. A recent report indicated that a majority of mortgages in Florida are “under water,” with the mortgage balance exceeding the property’s value. While credit has loosened somewhat, it’s still relatively tight by historical standards. Whereas consumer spending bounced back following previous severe recessions due to pent-up demand, it’s unlikely to occur this time. Given all these problems, consumer spending should improve slowly next year as households seek to pay off old debt and increase their savings. Constrained consumer spending will limit overall economic growth in the coming year. For Orlando, this means the city should not expect a significant rebound in tourism any time soon, as consumers limit their discretionary purchases.

Business (different design header treatment from regular subheads)

Business spending declined at a record rate at the end of 2008 and beginning of 2009. The worst may be behind us now, but the existence of considerable excess capacity means that most businesses won’t need to expand any time soon, putting a damper on construction of new offices and factories. Business purchases of new equipment, however, should fare better. Expectations of modest increases in sales will limit new purchases, but firms will seek to update their equipment as 2010 progresses. Orlando-based firms providing technological products and support should fare better than those engaged in commercial construction. Florida companies involved in export-oriented industries should benefit as parts of the global economy return to strong growth — including Florida’s No. 1 export market, Brazil. The weaker dollar should provide additional support to exporters, as U.S. goods become cheaper to buyers in other parts of the world.

Jobs (different design header treatment from regular subheads)

As of September, the official U.S. unemployment rate had risen to 9.8 percent. Yet, that figure rises to 17 percent if one considers a broader measure that includes those working part time, but wanting full-time jobs, as well as those who have become discouraged and given up looking for work. At that time, Florida’s unemployment rate was 11 percent, with its broader measure averaging 15.6 percent in the preceding year (the broader measure is likely to be closer to 18 percent when the figures are updated near press time). By late 2009, the official rate is expected to have surpassed 10 percent nationally and remain very high throughout 2010, at or above 9.5 percent by the end of 2010. Similarly, unemployment in Florida should exceed 11 percent while Orlando’s unemployment rate should peak close to 12 percent. Both the statewide and local unemployment rates should remain noticeably above 10 percent through the end of 2010. Given the expected slow growth in the economy, fewer jobs than usual are likely to be created. In addition, many of the first people hired will be those who have seen their hours reduced. As a result, unemployment will remain stubbornly high for quite a while.

Inflation (different design header treatment from regular subheads)

After reaching a nearly 60-year low, inflation is unlikely to return any time soon. Historically, inflation tends to rise when the economy overheats — when its resources get stretched too thin, resulting in higher costs that get passed on to consumers in the form of higher prices. No matter how you look at it, the economy has plenty of excess capacity. As the official U.S. unemployment rate approaches 10 percent, there are plenty of workers competing for each available job. Therefore, it’s unlikely that wage growth will accelerate any time soon. Since labor is typically the largest cost faced by most companies, this will place a lid on costs, reducing the pressure to raise prices. The limited wage growth will also hinder consumer spending, which will reduce the ability of companies to significantly raise prices. Capacity utilization has bounced off its bottom, but is about 70 percent, which is near a record low. Therefore, companies can use existing capacity without incurring much increase in costs. As a result, inflation should remain quite low for the next couple of years.

While much attention is given to the possibility of higher inflation, due to large increases in the Fed’s balance sheet, most economists aren’t concerned. Inflation occurs when too much money chases too few goods; there’s no chase taking place right now. Much of the increase in money is sitting in the accounts that banks maintain at the Fed, in the form of reserves. Unless banks start lending out the bulk of these reserves, the money won’t be used to purchase goods, and inflation will remain contained. As the credit market and economy continue to heal, the Fed will start to remove those excess reserves. Will they get this exit strategy exactly right? The timing will be difficult, but they’re unlikely to get it so wrong that inflation gets out of control.

Policy (different design header treatment from regular subheads)

This raises the question, when will the Fed start to increase interest rates? Before it starts raising rates, it will exit programs that have been used to stabilize the financial system. In fact, it has already exited several programs and has announced plans to stop its biggest program — the purchase of mortgage-backed securities — by March 2010. Though future rate decisions will depend on economic conditions at the time, it’s likely that the Fed will begin raising rates by summer 2010 and continue to raise them through the rest of the year. Recently, many members of the Fed’s policy-making committee made speeches indicating that they don’t want to repeat the mistake made earlier in the decade of leaving interest rates too low for too long.

Speaking about exit strategies, the other form of government stimulus has been fiscal policy involving tax cuts and spending increases. Contrary to popular perception, much of the stimulus was given to state governments to help them avoid severe budget cuts and/or tax increases. This didn’t stimulate the economy but instead prevented actions that would have further reduced overall spending. This will continue to have an impact in 2010. Florida will have a tight budget year once again, as it makes difficult decisions to reduce spending or increase fees to maintain a balanced budget. State tax revenue has plummeted recently, falling by the largest rate since the beginning of the Great Depression. State tax revenue in Florida began falling before that in other states, as the downturn hit Florida before most of the rest of the country, and has declined by about 12 percent during the year ending in June 2009.

Although most states need to balance their budgets, the federal government will continue to run extremely high budget deficits for years to come. Thus far, the deficits have had a very limited impact on interest rates, as investors are more than willing to put their money in the safe haven of U.S. government bonds. However, as economic recovery takes hold and businesses begin to seek financing for new investment, interest rates should begin to rise, particularly in the second half of 2010 and into 2011. The budget deficit will come down somewhat as the economy recovers and stimulus programs begin to phase out, but will remain significantly above desired levels. Difficult decisions will have to be made, but the question is this: Will the President and Congress make the politically unpopular decisions needed to keep the deficit in check? With midterm elections looming in fall 2010, the most likely changes in policy will be allowing the Bush tax cuts on upper-income earners to expire and extending unemployment benefits.

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Putting It All Together

Economists and other people sometimes use the same terms to mean different things. For economists, the Great Depression lasted from 1929 to 1933, when the economy began to recover. Most others think of the Great Depression as lasting until the start of World War II.

Today, most economists think the Great Recession is technically over, in that the economy is probably no longer shrinking. As viewed by most people, however, it is likely to continue. Economic growth is likely to remain sluggish, unemployment will remain very high and bad economic news will be mixed with more good news. The Orlando economy has seen the worst of the recession but is likely to only stabilize rather than experience noticeable growth in the coming year.

There are already possible signs of stability in the housing market. Other areas of the economy, such as job creation, will have to wait until the new year is well under way. Among the strongest parts of the economy will be business tied to the global economy. Whereas exports plummeted during the depths of the recession, Florida exporters should benefit significantly, as many emerging economies experience strong economic rebounds and dollar weakness makes American companies more competitive.

Just as individuals take time to recover following a heart attack, the economy will take some time to heal from the events of the past year. Better days lie ahead, but 2010 is likely to be a year of healing from the Great Recession.

Bill Seyfried is a professor of economics at the Crummer Graduate School of Business, Rollins College, in Winter Park. Prior to arriving at Crummer, Seyfried was a professor at the University of Central Arkansas, the College of Wooster, the Rose-Hulman Institute of Technology and Winthrop University. His work has been published extensively in academic journals, such as The Australian Economic Review, The American Economist, the Journal of Economics and Finance, and Applied Econometrics and International Development. He also has authored instructors’ manuals for leading textbooks in the areas of money, banking and financial markets, and international economics. He holds a B.S. degree from Rose-Hulman Institute of Technology and M.S. and Ph.D. degrees from Purdue University.