Quarterly Economic Outlook: Slow Growth and High Unemployment to Persist

by: Peter Morici

The outlook for GDP growth is better, but hardly exceptional, through the first half of 2011—something in the range of 3.3 percent through mid-2011. Inflation will remain below 2.5 percent and unemployment will remain at or above 9 percent into 2012.

A sovereign debt meltdown in Europe poses significant downside risks—it could thrust Europe and the United States into a double dip recession. Baring such a calamity, here is my assessment.

Fourth Quarter

Car and truck sales, technology replacements, better retail sales, and stronger exports lifted fourth quarter growth to about 3.3 percent, perhaps higher. Year over year, fourth quarter inflation was about 1.2 percent.

During the Great Recession, the average age of cars and trucks increased substantially, and private and commercial owners face costly maintenance expenses, making new purchases more cost attractive. Car and truck sales should improve to 12.36 million in the fourth quarter from 11.32 the first nine months of the year.

Personal and business technology sales got a similar boost, though the product mix continued to shift—you can hold in your hand what you carried in your backpack 2 years ago, and often left at home or in the office 5 years ago.

Retail sales were lifted, somewhat, by a stabilizing job market. Job seekers outside the hot areas—e.g., technical specialties in finance, information technology and health care—did not enjoy markedly improved prospects, but the 90 percent of workers holding jobs appear more confident about keeping their jobs. Also, Americans tend to become exhausted with thrift. Although value-oriented stores did better during the holiday season than did middle-range retailers, overall Americans are more confident to use their credit cards.

Fourth quarter exports got a lift from a weaker dollar against the euro earlier in the year—the export effect of a weaker or stronger dollar occurs with a lag of several months; consequently, the real trade deficit improved in the fourth quarter.

Q310

Q410

Q111

Q211

Q311

2010

2011

2012

GDP: Annual

2.6

3.3

3.2

3.2

2.6

2.9

3.0

2.8

GDP: Q4/Q4

2.8

3.0

2.8

CPI: Year/Year

1.2

1.2

1.5

2.3

2.5

1.6

2.2

2.3

Core CPI: Year/Year

0.9

0.6

1.0

1.1

1.2

1.0

1.2

1.4

Unemployment

9.6

9.6

9.6

9.5

9.5

9.6

9.5

9.5

Federal Funds

0.125

0.125

0.125

0.125

Click to enlarge

Outlook for 2011

In varying measure, the forces noted above are likely to persist through the spring, and GDP growth should exceed 3 percent through the second quarter of 2011. Other than energy, food prices and health care costs, inflation will remain reasonably tame. The consumer price index will rise more than 2 percent in 2011 and 2012, but core inflation will be contained by weak wage gains and continued productivity growth.

Lower taxes—for example, temporary reductions in payroll taxes and expensing for new capital purchases—and higher stock prices should give consumer and business spending an additional boost in the first half of the year, but those positives will be offset by higher energy and other commodity prices, higher food prices, accelerating health care costs, and disappointment with Administration efforts to calm regulatory uncertainty. Real consumer spending growth will moderate as 2011 progresses.

A stronger dollar against the euro in recent months, China’s continuing undervaluation of the yuan, and slower growth in Europe owing to the festering sovereign debt crisis and attendant national budget cuts will slow U.S. export growth, increase U.S. imports and raise the trade deficit. In addition, slowing U.S. oil production caused by new regulatory restrictions on development in the Gulf and elsewhere poses growing long-term problems and will increase dependence on imported oil.

Overall, energy and food inflation will slow growth in real consumers spending, and a growing trade deficit will subtract from demand for U.S.-made goods and services and combine to slow U.S. growth in the second half.

Commodity inflation, the trade deficit and slow U.S. growth are driven by similar forces.

China’s undervalued currency permits China to accomplish breakneck, energy-intensive GDP growth, raising global demand for oil and other commodities. China’s currency policy—printing yuan to buy dollars—causes inflation in China and provides Beijing with the hard currency to subsidize oil and other commodity imports causing tighter supplies globally, and inflation and slower growth outside China.

Those Chinese policies also drive up the U.S. trade deficit—by both increasing imports from China and the cost of imported oil—and slow U.S. growth. Without a change in China’s exchange rate policy or initiatives from the Obama Administration to counter that policy, the United States faces mediocre growth and high unemployment.

The Obama Administration recognizes it has viable options regarding China but has also indicated it lacks the political will to exercise those. Hence, the United States will continue to grow slowly and sink further into foreign debt.

U.S. productivity and labor force are approximately 2 and 1 percent a year, respectively. Hence, GDP growth at 3 percent is needed just to keep unemployment from rising, and growth must reach four percent for a full year to pull down unemployment by a full percentage point. Consequently, unemployment is likely to stay at or above 9 percent for quite some time.

Coming out of a deep recession, growth in the range of 5 percent for 2 or 3 years is possible but not likely given the lack of action regarding both China’s exchange rate policy and declining U.S. petroleum production.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.