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
