What Will Get the Economy Growing Again?

With Thursday's new GDP figures for Q3, I've updated my forecast.  Here's how it looks:

That last blue column, the slightly negative one, is last quarter's 0.3% decline.  I forecast declines in the current quarter as well as the first quarter of next year.

What will get the economy growing again? That's the most common question I'm getting in my many speeches this fall. We have three problems: 1) too many houses, 2) credit crunch, and 3) weak attitudes among consumers and businesses. 

Problem #1 won't be solved until we have another year of population growth. Problem #2 is being addressed by aggressive Fed and Treasury policy; I expect it to get solved (see qualification below) in six weeks or so. Problem #3 will be resolved by the many, many people who do not lose their jobs. Right now they are staying away from stores, but after a few months, they'll have paid down credit card balances, or they will have built up their bank accounts. They will say, "We've avoided job loss in this recession, and we have money, so let's spend." That happens in the spring.

The Fed starts draining liquidity from the banking system after six months of improvement, then they have to start raising rates quite dramatically to avoid inflation. Current policy is not inflationary in the current environment (credit crunch and weak attitudes), but it will be inflationary if left in place as credit and attitudes improve. Thus, look for a sharp tightening beginning in late 2009.

The current policy actions may not prove inflationary, but it will take a very deft touch on the monetary helm. The odds of over-steering or under-steering are very high, so I'm anticipating a more cyclical economy in the coming years than we've had in the past few years.

Qualification on the credit crunch: When I say that the credit crunch will soon be over, I mean that profitable businesses and prudent consumers will be able to get credit. I don't mean that credit spreads will be as narrow as historical averages, nor do I mean that much real estate development credit will be granted, nor that any sub-prime borrowers will get loans.

Comments

[Steven Hansen:]

i see the graph, but do not buy the forecasts. i have assumed people are creating these forecasts based on past recession recovery models. if i am wrong please advise how this forecast was created.

2008 Oct 31 05:26 AM

[Schweizer:]

Well, just look at his GDP forecast from February 2008 if you want to see how good his model is. It's useless!

seekingalpha.com/artic...

2008 Oct 31 07:15 AM

[John Lounsbury:]

Bill - - -
Your prediction is the most optimistic of the possible outcomes. The middle range would double the quarters of contraction to six. The most pessimistic outcomes double the time agaim to 2.5 to 3 years of contraction. I expect your prediction to be the most likely UNLESS China has a quarter of contraction. If that happens, the entire world engine will be contracting and the more dismal predictions will be very likely.

2008 Oct 31 08:59 AM

[Economics:]

According to MoneyMorning.com “Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis”. These banks need their hands slapped. This $250 billion recapitalization fund is being held by banks and being used to buy out smaller weaker banks to eliminate competition. This recapitalization package is supposed to pump money into the banking system to stimulate the economy. Displacement of funds will cause business failures and additional foreclosures (i.e. www.BuyMyHouseBeforeTh...) and cause another need for a cash infusion by taxpayers into the banking system.

This is not a consumer driven recession. Consumers have been stripped of their wealth by special interest driven legislation, wars, unchallenged illegal immigration, cheap foreign labor, offshore manufacturing, and predatory lending practices by financial institutions.

Too much of consumers' money is going to pay interest. Government legislation, the Fed, and the banks have stripped consumers of their wealth. The economy will not recover until consumers do. Lowering the interest rate and throwing money at banks and other corporations is not going to fix the problem. It is only going to make matter worse when the resulting inflation sets in. Banks are going to have to take their lumps along with everyone else. To reduce the severity, banks need to lower interest rates on credit cards, mortgages, personal loans, and lines of credit. Congress also needs to stop fooling around with things that stimulate the economy like tax credits for renewables and they need to stop bringing cheap foreign labor into the country.

2008 Oct 31 09:31 AM

[OldLimey:]

Economics: "This recapitalization package is supposed to pump money into the banking system to stimulate the economy."

Afraid I don't have a link, but I'm pretty sure that I've seen an official document (FDIC???) which specifically suggests cheap Treasury funding could be used to purchase competitors. Don't think it got much air-time in the mass media!

2008 Oct 31 02:55 PM

[Kunst:]

The key to the immediate future is employment. People with jobs will cut back, get their finances in better shape, but continue most spending and increase later. People who lose their jobs cut back all possible spending, and may face foreclosure and bankruptcy. So far, employment has held up fairly well. Recent announcements suggest that this may not continue. If unemployment goes up, the economy will spiral into a classic deflationary recession of unknown severity. From a government policy viewpoint, this would be at the top of my list.

2008 Nov 02 01:09 AM