2009 Economic Forecasts Ignore Demographic Shift

There is not enough data for any pundit to accurately forecast what the US economy will look like on December 31, 2009. In 2008, pretty much all forecasters were wrong in either events or timing or both. This year we have seen the impossible, and realize that pretty much anything is possible next year.

The economy is all about momentum. Once it is moving in a particular direction, the direction will continue until it runs past the equilibrium point. If you believe this is a normal recession, the economy will bounce right back as the equilibrium point was the economic level of December 2007 when the recession began. If you believe that a fundamental economic shift has occurred, then we have yet to reach the new equilibrium point.

The economy is currently contracting, and never appeared to fully recover from the 2000 / 2001 recession. The first signs of this current economic downturn were evident in mid-2006 in housing and unemployment. Looking back to December 2007, there was enough evidence of contraction that NBER called this the starting point of the recession.

Analyzing GDP since 1Q 2006, real growth (inflation adjusted) has been very slow. If the Iraq War was removed from the calculation, real growth was negligible to negative. There has been no driver for economic expansion except for the government since 2006. Without a driver, there can be no economic growth. And what does not grow, usually contracts.

Until the economy re-ignites, inflation is off of the table provided that the Fed does not go overboard monetizing the debt. This statement seems so illogical to me but it reinforces the perilous positions of the other major currencies and their economies. Currencies are valued against each other – not against a set standard.

The rest of the world is in a recession also. A year ago, I would have laughed at someone who said the world economies are coupled. There was ample evidence that Asia and Europe were creating their own economic winds, and the USA was becoming less and less important economically. It follows that the old adage, when the US sneezes, the rest of the world catches a cold, must still also be true. This means it is up to America to lead the world out of this recession, and we cannot rely on another country.

The reasons for this recession…

• Instruments of leverage – Mortgage-backed securities (MBS), leveraged buyouts (LBOs), collateralized debt obligations (CDOs), asset-backed securities (ABS), and sub-prime mortgages. As long as the buyer knew what they are buying, and can quantify the risks - this may not have been a problem. But crap was packaged without investors opening the box. As long as there is economic expansion, almost any decision will make money. The economic slowdown exploded a bad practice. A lot of wealth has been evaporated.

• Consumer debt – A subset of leverage is consumer debt. Credit cards and consumers using their houses as an ATM machine have built the largest per capita debt of any period in the history of America. At a certain point, the carrying cost of the debt eliminates enough disposable income that discretionary spending is reduced – and the economic engine begins to lose power.

• Housing – Another subset of leverage is housing. Leverage allowed the average Joe to make money by buying and selling houses. More and more people joined the party until the price of housing over ran the buyers' ability to purchase. The buyers dried up, the values began to fall. Wealth was destroyed. This cascade will continue.

• Demographic Shift – The maturing baby boomers stopped consuming. Spengler, in his recent diatribe, Waking from Lever-Lever Land, continues to hammer on this point. There is no way to go back to past economic growth because the baby boomer economic engine has already retired.

• Evaporation of Wealth – In no past recession, has wealth evaporation been as severe. The wealth evaporation ratios now equal that of the Great Depression. Even though wealth evaporation is a symptom of economic contraction, it is now a significant impediment to recovery. Without wealth, investment is limited. The government cannot take the place of an investor. Like a ball player kicked in the nuts, the economy will rest while wealth is rebuilt. This time period should be measured in years.

Bottom line

Now with massive evaporation of wealth, housing, no economic driver, and maxed out credit - what will pull us out of a recession? Government deficit spending will help short term, but will restrain recovery due to the added debt burden. Pulling out of Iraq will have negative effects on the war toys industries but will have a positive effect on debt reduction. Debt reduction will not happen because of bailouts and government infrastructure projects.

Economic forecasts are relying on government stimulus spending, the Fed replacing high interest rate paper with low interest rate paper, and the Fed’s liquidity to overcome the negative forces which are pulling on the economy. No doubt they will have some mitigating effects but will they be more than transitory? What about the potential of additional economic crisis? What about the continuing fall in employment? There are too many goblins out there to start painting rosy pictures of the future, or believing that no additional shoes will fall.

My guess is a -5.0% (negative five percent) real GDP growth in 2009 based on leading indicators, demographic changes, and negative economic momentum. This is more negative than other forecasters who appear to be using historical recession recovery models. My forecast attempts to integrate demographic changes which cannot be quantified. A -0.7% GDP contraction occurred in 1949 – anything above this would be the largest economic contraction since the Great Depression.

I do have a few caveats:

• Stimulus packages. I do not believe effects of any stimulus will be felt until 3Q 2009 – and then only at a slow and continuously building rate. If a stimulus could be found to have immediate impact, my guess would be adjusted upward.

• Inflation. My guess uses 2000 Chained dollars so the effects of inflation and deflation are included. However, hyper-inflation or 1929 type hyper-deflation have economic consequences which are not included.

• Luck. I have included some bad luck in my guess. If no new bad economic “shoes” fall in 2009, economic conditions will be better than my guess.

• Guess. I do not have a crystal ball to forecast a year in the future, and in these uncertain and unstable times you should not believe any long term forecast. I am fairly confident of my guess until some point between the first and second quarter of 2009. After that, other unpredictable and dynamic economic factors start creeping in making the crystal ball opaque.

Other Pundits' Forecasts

• Morgan Stanley: -1.9%
• CNN: +2.9%
• The Conference Board: -1.5%
• NABE: +0.7%
• IMF: +0.6%
• UBS: +1.8%
• Goldman Sachs: +1.5%

You will note the guesses by the pundits vary from high to low by almost 5%. I do not recall a time the forecasts varied by more than 1% or 2%. I have laid out my rationale for this 2009 economic forecast. It would be interesting to hear your thoughts and forecasts for 2009 – and here is your chance to document them.

Disclosure: none

Comments

[Moon Kil Woong:]

Any GDP contraction bodes very ill for the US because it highlights our deficit relative to GDP which will grow with another round of stimulus. Overall continued deficit spending is unsustainable simply because the interest payments will become astoundingly huge when inflation bounces back to normal. The Fed's low rates will hold off the interest payment dogs but comes at the cost of a stagnant or declining GDP against a backdrop of the real threatening ration Government debt as a percentage of GDP.

Good article, good points. Pulling out of Iraq will strangely be just another deflationary event unless it is all shifted to Afghanistan. So no post war peace dividend benefits like we got after WWI or WWII.

2008 Dec 29 05:26 AM

[Income Tax:]

0%! This will be my prediction for 2009 GDP growth. We will have some contraction in the first half and slowly recover later 2009. Very insightful analysis. Housing is the most critical point while war, stimulus package and other are important factors as well. When house price stops falling (hopefully in April 2009 when Spring comes), people will have more "wealth", and housing-related industry will grow as well (which I count of 30% of GDP, from raw material to electronics, furniture and infrastructure)

2008 Dec 29 05:44 AM

[Daniel Herkes:]

Good analysis. The baby boomers are beginning to act like old people. That's because old people have better sense when it comes to discretionary purchases, and are unwilling to leverage. I wonder what the mindset of the young will be like after they have a taste of this sort of setback? Will they resemble the dollar stretching, penny pinching generation of the depression?

2008 Dec 29 06:40 AM

[Strangewalk:]

Genuine wealth creation and sustainable recovery via American manufacturing cannot return since the same factors (unions, environmental extremists, worker's comp shake-down lawyers, etc) that forced its move to China would just drive it back there again. The only kind of recovery that's plausible is a new round of credit expansion resulting from Chinese funding of US consumption. This model hopefully won't return again, so what's left?

2008 Dec 29 07:05 AM

[cristian:]

You hit the nail on the head, unlike the the empty rantings of the article.
What is left is adjustment, to the living standards of third world country.


On Dec 29 07:05 AM Strangewalk wrote:

> Genuine wealth creation and sustainable recovery via American manufacturing
> cannot return since the same factors (unions, environmental extremists,
> worker's comp shake-down lawyers, etc) that forced its move to China
> would just drive it back there again. The only kind of recovery that's
> plausible is a new round of credit expansion resulting from Chinese
> funding of US consumption. This model hopefully won't return again,
> so what's left?

2008 Dec 29 07:21 AM

[investor88:]

I am afraid Steven is not far off with a minus 5% gdp forecast for 2009. I would go for a little less than 5% may minus 3%.

2008 Dec 29 08:01 AM

[Jim Hawthorne:]

Outstanding analytical work, Steve! Thanks for yet another very useful article!
While there just might be enough poop in the stimulus package/inflation combination to spark a modest 1Q 'hope' rally, the search for any significant economic drivers that could function as spark-plugs has eluded me.
I also detect a very clear general bearish message amongst my own grey-bearded demographic insofar as there will be no incentive to plunge back into the market until a clear uptrend with higher highs and higher lows is established.
The traders I know are all pretty much content to sit it out with the attitude that you can make up for missed opportunities quicker than you can make up for lost dollars! Risk-aversion is extremely high, it seems to me.
So, just as there are no obvious market fundamentals to lead the market into a sustained rally, so too there is a deeply entrenched negative market sentiment that creates its own inertia.
The flexible and nimble traders will be the only ones smiling this year!

2008 Dec 29 08:07 AM

[Tom Armistead:]

Good article, the demographic factor is important: baby boomers have just had their retirement savings severely reduced and are unlikely to celebrate by upgrading to the next size McMansion or buying a new car.

2008 Dec 29 08:12 AM

[Sayde:]

Great succinct analysis. Thank you. I just read Krugman's Depression economics and have to say the above article provided a lot more insight in a lot less space. Krugman ends the book saying simply "I don't think we're in to a depression but I could be wrong." This article lays out all the contributory factors and gives you a sense of the best and worst potential scenarios without ever launching into an arcane and lengthy description of monetary policy. Bravo.

2008 Dec 29 08:41 AM

[Devil's River:]

Daniel Arnold wrote in The Great Bust Ahead that the demographic trends you mention explain the US and global economy quite well. He explains how demographics caused the 1929 depression and how they will cause the depression that is happening right now. It is unavoidable and it will last much longer and be more severe than most pundits are predicting. The boomer shift from borrowing and consuming and investing in stocks to saving and living off stock dividends will continue and will accelerate over the next decade. Arnold predicted all this several years ago. I wish I had believed him.

2008 Dec 29 08:43 AM

[Longinvestor:]

Excellent article. I had not considered that the expansion/contraction was considerably affected by the "baby boomer" demographics. Their retirement was always pumped as being a "opportunity" in health care corporation investments.
As far as the wealth evaporation theory, I like to demonstrate what happens in a game-like situation. Take some monopoly money and sheets of paper for stocks and bonds. You can see who winds up holding the evaporated wealth. You will see those who sell high plus those who sell short still possess the wealth in cash or equivalent. Nothing evaporated except the auction value of the stocks and bonds...which was totally subjective opinion in the first place.

2008 Dec 29 08:46 AM

[spondoolix:]

I would include a demographic "guess" that the generations younger than baby boomers will be forced into better financial management of personal affairs - to wit (1): one will not be able to obtain a mortgage without the cash for a down payment, and without the provable income to make the payment.

to wit (2): My son (23) has seen the wisdom in changing his financial modus operandi from profligate deficit spending to something that he considers more "conservative" - just being broke all the time (but debt free).

If these two (of many) examples are indicative of a change in general behavior among the young, then maybe we won't see Elliott's 5th wave.

2008 Dec 29 09:17 AM

[donzelion:]

You write: In no past recession, has wealth evaporation been as severe. The wealth evaporation ratios now equal that of the Great Depression.

If leverage is a major factor in wealth destruction, wouldn't that suggest that real wealth destruction occurred before the current recession, but was simply hidden away by financial products?

2008 Dec 29 09:45 AM

[petetoth:]

- 5.0 percent might be too optimistic if you are expecting other shoes to drop. If the entire foot locker tumbles you'll be looking at a 20 to 30% plunge.

As you stated in your introduction: "There is not enough data for any pundit to accurately forecast what the US economy will look like on December 31, 2009" and "the economy is all about momentum."

One thing is for sure though, that when bad things happen in today's global economy, they happen blindingly fast.

2008 Dec 29 10:31 AM

[Jason Rines...:]

Exactly. The Demographic Shift part of the article is spot on. I am in Consumer Healthcare. Even this sector has deflated with 21% less Rx usage in 2008. Healthcare and Energy have been touted as economic rebuilding engines by the Obama admin. Fiscal stimulus will help but I agree with Mr. Hansen this will take a few quarters for it to begin working into the system.


On Dec 29 08:12 AM Tom Armistead wrote:

> Good article, the demographic factor is important: baby boomers have
> just had their retirement savings severely reduced and are unlikely
> to celebrate by upgrading to the next size McMansion or buying a
> new car.

2008 Dec 29 10:52 AM

[axelrod608:]

Steven - excellent article. There are so many pundits predicting something based on one factor, one sector or one measurement while the truth is that our economy is a very complex construct with very many large and small factors driving it. As you point out, and I agree, there are a number of major sectors at risk, unlikely to provide any positive push to the economy in the near future.

One sector you left out is commercial real estate, which - other than apartments - is limping badly into the new year and may well beat the automakers to the crash.

I would love to be an optimist, to be wrong, but the overall health of the economy and its primary drivers just won't support optimism. I fear our "bailout" plans will do to the American economy what the Japanese bank bailouts of the 80's did for theirs. Permanent recession.

2008 Dec 29 11:04 AM

[derryl:]

Mr. Hansen has pulled all the factors together in one article and given us a clear eyed look into a murky crystal ball. In a time before econometrics piled assumption upon assumption into computer models that 'predicted the future', what Mr. Hansen is doing used to be called intelligence.

2008 Dec 29 11:04 AM

[User 327414:]

I don't disagree with your analysis, Steve, but it seems to me most pundits are too focused on the retiring Baby Boomers, with little or no attention paid to an even larger bulge in the population pipeline: the children of the Boomers. All of those Boomer kids born in the 1980s are fast approaching the ages when THEY will begin to acquire mortgages, car payments, toys and vacations for their kids and, yes, retirement assets. Couldn't this be at least part of the fuel for the next bull market run?

As an aside, after spending the Christmas holiday with a house full of 20-somethings, I believe they are considerably more optimistic about the economy and the future of the country than many of us gray-beards.

2008 Dec 29 11:07 AM

[Lilguy:]

Good insights and "guess" about 2009. My bottom line is about the same as yours--minus 5% GDP next year--but I see it declining more slowly, yet longer--at least through 3Q and probably year-end 2009. Why?

--Home values will continue to deline--probably another 10-20%--as mis-directed efforts to stabilize prices continue to fail. Banks still won't lend to well-qualified buyers no matter how low rates go.

--Foreclosures will continue to grow at an accelerating rate across mortgage types as more households lose jobs, and many just walk away.

--Banks worldwide will continue to contract as they write down another trillion dollars in bad, highly leveraged debt. The Fed will pump more money into them by every means possible, but the money will just disappear as the banks reserves are eaten by the bad debt.

--Unemployment (official U3, which captures only about half of reality) will sail passed 10% (the number the incoming Obama team is projecting) to 12% as retailers, auto dealers, and many others in retailing of all varieties lay off workers and many go into bankruptcy.

--Tax rebates, credits, and other early efforts to stimulate the economy will go to savings or paying off outstanding debts, not new purchases. Infrastructure investments will play no role in the stimulating the economy in 2009 given the lead time to get organized.

--The global economy--trade and finance--will slow more than America's, curtailing US imports and exports as well as incoming and outgoing private direct investment. This will have a greater impact on GDP than most people now imagine.

In short, 2009 will suck. If we're lucky, we'll reach the bottom by the end of the year. Hopefully, 2010 will be better.

--

2008 Dec 29 11:22 AM

[Firat Ünlü:]

Could people please stop using consumption as a means to measure the economy? GDP growth in the past was a mirage and now it's time to realize that an economy where consumption made up 70%, that's largely based on services, whose mayor growth engines are in decline (fire), whose people are maxxed out, whose states cut spending etc will maybe, just maybe have to deal with a downturn that could turn out to be severe.
Now's the final chance to get it right, it'll all depend on the stimulus package, restructuring and finding new opportunities in new areas.

2008 Dec 29 11:32 AM

[FreddieBoy:]

I agree- housing was going to roll over because of the demographics and the downturn has been exponentially impacted by the gross overbuilding and mortgage leverage.Housing is in deep trouble until 2013 at best no matter wahat happens to mortgage rates

2008 Dec 29 11:51 AM

[specks:]

You know, it seems to me the problem is one of government fraud. This article is just another smoke screen of what's really going on. Hans Sennholz in his book, "Age of Inflation," talks about the dollar being worth, I believe, something like 8 cents. But guess what.... that was in 1979!!
What do you think it's really worth today?
It's like the media asking, when referring to the auto bailout, "Is X number of dollars enough?
Wrong question. What we should be asking is, " Which of these politicians should we hang FIRST?
We don't know whether to spend, save or just burn our money because we don't know what the incompetants are going to do next. I don't know about anyone else, but I'm telling you, we may be headed for a serious revolution when people figure out how they've been, and are, being duped.

2008 Dec 29 12:07 PM

[carey_jim:]

I have always been an agnostic with regard to the deflation/inflation argument and I only play the devil's advocate for the deflation argument because I think long experience with inflation has blinded us to the possibility of deflation.

One more cause of future deflation would be a change in consumption habits which you hint at with the title of your article. Advertisers have prodded Americans to 'shop till you drop' by an avalanche of advertising that seems normal to most Americans, but might appear absurdly excessive to future generations. The 'Shop till you drop' mentality might come to an end when the baby boomer generation has finally retired.

2008 Dec 29 12:47 PM

[Dave Wrixon:]

The question is more like: "How will we ever know?"

Japan, China, Germany along with most of the rest of Europe, the Middle East and Russian are all disappearing down the toilet due mainly to what is happening in America. In other words wealth destruction and collapsing sales.

The US government (and I use a small g advisedly) is telling us that GDP is contracting by less than 1%.

Seriously, does anyone actually believe the numbers?

2008 Dec 29 12:51 PM

[John Lounsbury:]

Steve - - -

Another good article. I'd better stop other projects and finish my housing market analysis before you make my list of references to cite too long.

User327414 - Good point about the "Echo Boom", it will mitigate the retiring boomer affect, but will not balance it out entirely.

Axelrod - Commercial real estate will be a significant problem in 2009. I have not tried to analyze it, hoping it will get a good treatment from someone else soon. Too many things on my plate. I'm not as efficient as Steven Hanson at turning out well researched articles.

I agree with the recurring theme in the comment stream (Yamu, carey_jim, spondoolix and others) that the economy is shifting from a historic high percentage of consumerism and that the change will be long lasting, if not permanent (at least in terms of decades).

2008 Dec 29 01:07 PM

[axelrod608:]

John Lounsbury - false modesty, my friend. >> "I'm not as efficient as Steven Hanson at turning out well researched articles " >> You provide SA with some of the very best, most insightful articles and comments. It is clear that, while you do pointed research on specifics, you also have the eye of a generalist and a keen ability to synthesize a wide scope of factors into your analyses.

Much economic "analysis" is so limited in scope that it pertains very little to the economy as a whole. Or as my son would say, "charts, schmarts".

When one attempts to view the economy as a whole, the view does not inspire great confidence, though there may be small rays of hope here and there. Your insights are valuable and needed.

2008 Dec 29 01:45 PM

[Chris B:]

I agree with the other posters that the demographic point is the most interesting one. The baby boomers are at or near the end of both their earnings potential and their access to credit. They have seen their retirement investments decimated even as their credit card balances have skyrocketed. Their too-big McMansions are now worth less than their mortgage (and their kids can't afford to own the thing, even if they could get a mortgage, which is why they live at home until they're 30). Though boomers control most of the middle-class wealth in this country, their debts (and the national debt) will prevent most of that wealth from being transferred to the next generation. Their massive healthcare expenses have just begun.

Because so many boomers defaulted on everything from mortgages to car loans to credit cards in the last few years, credit may be permanently tighter for generations X and Y. This will impair their ability to take on debt and will result in a forced austerity regardless of what they would like.

Increasingly, it looks like the life goals of generations X & Y will be to take care of their broke, aging parents rather than accumulating the status symbols that broke the boomers in the first place. They will come to see the purchase of new cars, fancy furnishings, vacations, and big houses as the unfortunate mistakes that destroyed their family wealth and stability, and shun those decisions accordingly.

We can expect intergenerational tensions soon, as the retired boomers vote to raise taxes on the struggling younger generations to support their lifestyle and healthcare. The acrid politics of the future might prompt many members of the younger generations to just walk away from their dependent yet still self-centered parents. It could get ugly.

2008 Dec 29 03:03 PM

[John Lounsbury:]

axelrod - - -

Thanks for your overly generous comments, but I am reminded of a quote I heard attributed to one of Obama's daughters when walking out in front of a cheering crowd: "Mommy, this is embarassing." I think she recognized, even if subconciously, that the applause was not really for her personally and having herself exposed to it produced discomfort.

If you do read anything else I write, I hope you give me any critical feedback you can. I learn something from writing and even more, sometimes, by reading the resulting comment stream.

Thanks again.

2008 Dec 29 03:32 PM

[John Lounsbury:]

Ray Metcalfe - - -

Excellent comment. Hope I catch your future comments. I am trying to get an article finished on the prospects for the housing market. I'm dealing with collected data. I wish I had your experience background to give more perspective to the analysis.

If you have the time to relate your experiences to current market data, it would make a good series of articles. I'm not on the editorial board for Seeking Alpha (and they do reject a majority of contributed articles), but I would hope they would recognize your credentials and that the quality of the article would be as good as I think it could be.

Just a lttle nudge. Hope you consider it.

2008 Dec 29 03:43 PM

[Steven Hansen:]

I appreciate the additional points made by constructe,dan herkes,jim hawthorne,tom armistead, sayde, devil's river, longinvestor,spondooli... ithinkbig, lilguy, freddieboy, carey_jim, chrisb, Ray Metcalfe, and John Lounsbury.

strangewalk - what is left is japanese style economy.

donzelion - you are correct in that some of the wealth destruction occurred before this crisis but the participants did not realize it because they did not cash out.

axelrod - you are spot on as commercial realestate is a huge problem. loans are usually short term and must be rolled over. with weak income and balance sheets, which lender will loan. then the issue of commercial real estate value will implode. the effects of this were in my number as this was one of the bad luck items which i expected.

user 327414 - the kids of boomers actually started in the 70's. they were also given haircuts. growth is about investment. they don't have enough stroke (assets) yet, and they will soon begin carrying the boomers. i wish they were a more concentrated bubble but they are so spread out. but for sure they are a demographic force which i believe are starting serious wealth building. they will be powerful coming out of this event - but i am not sure how they can be much of a force in 2009.

yamu - spiritually you are correct about consumption, but consumption is measured in the economy and this is what this article was about. this recesssion in part was caused by the elements you mention. we will never get it right, because what is right is always changing. and it is this turmoil which is disruptive but triggers a new round of growth.

Dave Wrixon - GDP numbers are trailing indicators. so with an economy in decline, things ARE worse than the numbers show. from past recessions, i know that things are always worse than the numbers show.

Steven Hansen

2008 Dec 29 07:16 PM

[Jolly_Rancher:]

What if a few new developements spring up that increase the efficiency of consumers such that on balance incomes increase enough to add savings and economic efficiencies. What if California, Florida and the northeast suddenly adopt pro-drilling stance? What if the government begins to provide incentives for nuclear power? What if consumer interest rates continue to fall to the 2-3% range? What if gasoline price continues to fall to 1.00? What if we remove ouselves from Iraq? What if the government provides healthcare removing this economic nightmare burden from business? The list goes on. All of these will add real dollars to people's pockets. Some are more likely than others. But such is the history of the human race. Unfortunately, some of these solutions will require more pain before people realize the need to adopt.

2008 Dec 29 09:22 PM

[Lin:]

Great article Steve ! Chris B you are correct !

Demographics have a huge influence on the economy . The main reason for Japans 20 year , never ending recession , is due to a very large part of the population being very elderly . The same with the US + the baby boomers retiring in mass . The boomers lost large amounts of their savings during the dot com crash . This market crash , along with the housing market crash has decimated most of their collective " net worths ". The commercial real estate crash will be huge . the many states + cities now bankrupt is also very dire . As Steve says , " I see no way out of this ".The " something for nothing " jobs are history as well .

2008 Dec 29 10:46 PM

[tb1975:]

"There is not enough data for any pundit to accurately forecast what the US economy will look like on December 31, 2009. In 2008, pretty much all forecasters were wrong in either events or timing or both."

Maybe pretty much all were wrong- all except for Nouriel Roubini. He certainly seems to have enough data to make accurate prediction after accurate prediction after accurate prediction.

BTW, he sees a 5% cumulative fall in GDP from peak to trough. And he has plenty of data to back it up. visit his website rgemonitor.com if you'd like to check it out.

2008 Dec 29 11:17 PM

[Kunst:]

The US dollar has to fall in value. We are taking on more debt than we can service. To keep interest rates and payments from overwhelming us, the Fed will buy Treasury debt. This will increase the money supply and lead to inflation and a drop in the dollar. That in turn will reduce debt service burdens as well as reinflating asset (e.g., housing) prices. We will all have more dollars but be poorer.

2008 Dec 30 12:31 AM

[Steven Hansen:]

tb1975..

i could not find roubini's -5% projection. if you could find the link please let me know. what i found was this from november 2008:

www.godlikeproductions...

"* The U.S. will experience its most severe recession since WWII, much worse and longer and deeper than even the 1974-75 and 1980-82 recessions. The recession will continue until at least the end of 2009 for a cumulative GDP drop of over 4%; the unemployment rate will likely reach 9%. The US consumer is shopped out saving less and debt burdened and now faltering: this will be the worst consumer recession in decades.

* The prospect of a short and shallow 6-8 months V-shaped recession is out of the window; a U-shaped 18-24 months recession is now a certainty and the probability of a worse multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009 the recovery could be so weak because of the impairment of the financial system and of the credit mechanism (i.e. a growth rate of 1-1.5% for a while well below the potential of 2.5-2.75%) that it may feel like a recession even if the economy is technically out of the recession."

also from roubini's rge monitor website i found the following:

www.rgemonitor.com/blo...

Fed: GDP growth: 0.0-0.3% (2008) and -0.2 to -1.1% (2009). Unemployment rate: 6.3-6.5% (2008) and 7.1-7.6% (2009); OECD: Growth at +0.4% in 2008 and -1.2% in 2009; IMF: Growth at 1.4% in 2008, -0.7% in 2009;
Citi: U.S. economy to grow 1.3% in 2008 and to contract 1.5% in 2009; Morgan Stanley: GDP will contract 6% in Q4 and 3.25% in Q1; 2009: -1.3%; Deutsche Bank: U.S. to grow 1.2% in 2008 and contract 2% in 2009; consistent with an 18 month recession


steven hansen

2008 Dec 30 12:50 AM

[Ross Snyder:]

Statistics will be almost meaningless in 2009. The year should be an *inflection point* between hyper-deflation and hyper-inflation. If commodities bounce back to 2005-2006 levels by next December, but groceries are 15% cheaper and electronics 30% cheaper, how do you measure GDP?

Major currencies will continue to swing 10-50% in a few months' time. How does that throw import/export data for a loop?

I'd look at statistics more meaningful to Joe Q. Public. By December 2009:
- Unemployment will be between 11-15%;
- Depending on when and which commodities are included, deflation will exceed 5%;
- Those with jobs will enjoy their growth in purchasing power.

But as global trade dries up (tight credit, wild currency swings, sovereign defaults), any rise in consumption by the top 50% of Americans will kick-start hyperinflation. Global markets are too tight, all the players are placing their bets in the same directions.

Shortages and low prices at times will coincide. Volatility in 2009 will be studied in ECON 101 for centuries to come.

2008 Dec 30 12:51 AM

[Dave Wrixon:]

What is noticeable, is this is the first recession where it took a year to identify it, and just every single set of data coming of US Government has been retrospectively adjusted to the bad. Through to the election there was definitely a lot of talking up going on. As soon as Bush lost the data got worst.

I very much suspect that things like equipping the US Military in Iraq is not only being counted at GDP, but also Exports. What you actually have there is just Government Overhead and Debt. So effectively accounting entries are just being made on the wrong side of the Leger most of the time.

As for the employment statistics, I don't even want to go there, but frankly I don't believe a word of it. The bottom line is Obama will want to clean up the statistics a bit so it makes his term look better. However, can even he really come out with the truth at this stage of the game. It reminds me of Jack Nicholson to Tom Cruise. "You can't handle the truth".

2008 Dec 30 01:15 AM

[Steven Hansen:]

Thane and Dave.....

i personally believe your comments are true and i could have written them. specifically i love:

"Volatility in 2009 will be studied in ECON 101 for centuries to come. "
i am a student of the economy. i could not have luckier than to live through these times. the only regret i have is the poor will suffer needlessly because of some very bad decisions made by economists, politicians, and fat cats over the last 20 years.

"What is noticeable, is this is the first recession where it took a year to identify it"
the nber dating of this recession is suspect. if you look at the data, four different dates were possible:
1) go back and declare we never left the 2000 / 2001 recession
2) economic data is so weak beginning in 2006, call this the beginning date.
3) use the dec 2007 date ignoring recovery in 2q 2008.
4) use the 3q2008 as this is when the economy really started to go south. i would also point out the 3q2008 was supported using nber's traditional method of picking.

steven hansen

2008 Dec 30 02:24 AM

[scotty1560:]

Steve's articles are the best..always enjoy them.
Guess what..demographics will occur in a natural fashion over time.
Parts of the country like upstate NY, PA, Ohio will deal with smaller
and aging populations, while warmer states deal with growth.
Those empty condos in Miami will become rental complexes and
the poor malls and strip centers, well...mmm...ghost towns?
I'll bet the iguanas are licking their chops about new territory.
I like upstate NY, traffic is light, still a few trees left, the lakes are nice
to...ditto Maine...life could be worse...I can always plant a garden.
I'm "hoping" they lower the school tax..less and less kids upstate.

I see no "real" recovery. 100% financing and 30 times reserves does wonders
for assets- without those artificial steroids what do we really have. We
have an non-functional, corrupt model of growth and trade. Expect lower
salaries and years of "under par" equities and real estate. Commercial
real estate was totally overbuilt, and those anchors look a little shaky.
We are "stuck in the mud", bailouts are little "band aids".

This leveraging "experiment" has uncloaked itself, we have lost and
now wait for the punishment, slow painful growth and a more humble existence. The only inflation I see is the bad kind ala Gerry Ford's "WIP - Whip Inflation Now!", where's "federal agent" Elvis when you really need him?

The good news is the airports will be less congested. Old fashioned crime
probably headed "much" higher- good for the securities providers.

2008 Dec 31 02:41 AM