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Quarterly Forecasts

It is the season for economic forecasts, and I have been polled by Reuters, among others. Here is my response.

Growth

Generally, the outlook is for mediocre growth—a tad less than 3 percent—and unemployment not to improve much.

The Federal Reserve will not raise the target federal funds rate until at least after the mid-term elections.

Unemployment will peak this quarter or next close to 10 percent then decline only gradually. Growth well above 3 percent or a wholesale decline in adult participation in the labor force is needed to pull the unemployment rate down significantly.

Double Dip?

The chances of a double dip recession are just below 50 percent. If the EU patch for Greece and others holds, then the economic expansion will continue in the United States, affected but not derailed by troubles in Europe. If a bank contagion ensues, all bets are off, grab a combat helmet and hit the trenches.

It would be very interesting, though terribly tragic, to see how President Obama and Secretary Geithner apply too big to fail a second time around. The Bush and Obama Administrations could have resolved Citigroup (NYSE:C) and AIG—they didn’t need new legislation because the government essentially bought control and assumed their debts—and the government did not need to negotiate lower payouts for Goldman Sachs (NYSE:GS) and others. They could have simply imposed those as they did to Chrysler’s bank creditors.

Stock Market

If U.S. growth continues near three percent, the stock market will recover and reach new highs—the Dow will rocket to 13,000.

If growth languishes between 1.5 and 2.5 percent, equities will recover but that is about all. I don't see growth at less than 1.5 percent without a wholesale derailing of the recovery.

To some considerable measure the outlook is binary--the patch in Europe holds or it doesn't.

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

2010

2011

Real GDP: Annualized Quarterly % change, S/A

3.0

2.8

3.2

2.8

2.8

2.8

2.8

2.8

3.1

2.9

Real GDP: Annual: Q4/Q4 % change

3.0

2.8

CPI: Year/Year % change

2.0

1.6

1.7

2.0

2.8

2.9

2.9

1.9

2.6

Core CPI: Year/Year % change

1.0

1.1

1.2

1.7

2.0

2.1

2.1

1.1

2.0

Federal funds rate: end-period

0.125

0.125

0.125

Disclosure: No positions

Source: A Double-Dip Recession?