Batten Down the Hatches: Economic Forecast 14 comments
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Nothing could make me happier than to put the financial crisis behind us. The legislation passed Friday by our elected representatives was a relief. As a nation, we had, in my view, reached a point where we needed to see that our elected leaders could come together and act in unison. In this case, appearance of action was probably as important as the action itself.
As far as we've come, though, we have further to go; the crisis is not behind us. At this early stage of discovering the nature of the problem, the consequences of the rescue plan are not well understood. We don't know how well the plan will work. My best hope is that it may be the beginning of the end of the crisis.
But the beginning of the end of the financial crisis marks the end of the beginning of an economic downturn that now looks to be much deeper and longer lasting than we had anticipated just a few weeks ago. The Department of Labor's jobs and payroll report for September has put an end to “Will there be a recession?” talk. After reporting that U.S. payrolls plunged by 159,000 jobs last month--the worst loss in five years-- the question is no longer “if,” but “how bad will it be?”
The graphic below paints a grim picture of the last twelve months:
The trend is unmistakable and the indicators pointing forward are even worse. Every month since last October has seen fewer jobs for Americans than the previous one, and it appears that the losses are accelerating. The Labor Department reports that over the last nine consecutive months, the economy has seen 760,000 jobs eliminated. The report does not even cover the most recent events that led to the $700 billion rescue package passed on Friday. In other words, the employment picture painted above does not reflect the effects of the credit contraction that has seized up the credit market in the last week or so.
The bad employment news was spread over almost all sectors of the economy: manufacturing jobs fell by 51,000 in September (-442,000 YTD); retailer and the construction industry each lost 35,000 jobs; transportation and warehousing fell by 16,000. Financial services lost 17,000, down 172,000 jobs from their December 2006 peak.
What few bright spots there are, are decidedly dim: mining added 8,000 jobs for the month, and government payrolls expanded by 9,000. Healthcare added about 17,000. Neither is there solace in rising wages. Average weekly wages for 80% of the American workforce have risen 2.8% over the last twelve months, which is a 2% to 3% loss to inflation.
The bottom line on this arithmetic is that the standard of living of working Americans is falling, and, given that the credit crisis hasn't even been factored in, it doesn't look good down the road. A Goldman Sachs economist said that the unemployment rate may rise to 8% next year, and there are others who echo that belief. Economists have shifted their outlook from slow or no growth to the longest recession since 1980-82.
The depth and length of the recession is still debatable, however. Some fear a long period of contraction; some think the economy will begin recovering in mid 2009. On Wednesday I listened in on a conference call sponsored by Wisdom Tree, where Jeremy Siegel of the Wharton School shared his outlook. He sees a possible turn-up by spring or summer, but his model assumes that the Dow Jones Index bottomed last Monday, and his view was made without knowing the details of the September jobs report. His prediction was based on the general rule that the stock market often turns up or down about six months before the economy recovers or declines. But, this model is not reliable. Many times predicted recessions fail to occur, and false predictions of an up-turn are too frequent. If Mr. Siegel's prediction turns out to be correct, then the recession will be mild. But from the reading I have done, the general outlook by economists, especially after the September jobs report, is for much worse. Some see a declining output for three or more consecutive quarters. This could put the beginning of the recovery as late next year.
There are important implications of the change in outlook. First, there is widespread agreement that the Federal Reserve Open Market Committee will lower interest rates, perhaps as early as their next meeting. The consensus is that it may eventually be lowered to 1% by sometime next year. There are two reasons for this outlook: (1) The economy is failing and needs stimulus, and (2) inflation pressures have abated.
The Conference Board projects that U.S. inflation peaked in the third quarter of this year at a 6.5% annualized rate. By the fourth quarter they expect it to fall to 5.5% and to 3% by the third quarter of 2009. If the recession is as bad as some think, however, inflation may actually fall further.
This inflation estimate is probably applicable to other nations as well. The German economy is projected to decline over 1% in 2009. England is already in a decline, and emerging markets have been in decline for some months. China and India, however, are expected to continue their growth, but at a slower pace. All these factors seem to point to a lower world demand for commodities and goods and services, which will reduce inflationary pressures.
It is difficult to predict how lower interest will affect the U.S. dollar. Generally, lower interest rates would mean an outflow of capital from America to higher interest rate countries. This is usually a prescription for a falling dollar. But, it may not work that way this time. Where do investors go with their dollars? Europe is expected to lower its rates in the face of a falling economy. The emerging markets are already under pressure and their currencies are falling like stones. China's yuan and the Japanese yen might do well, but both these countries pay low interest rates, so they are not attractive as carry trade holdings. My guess is that the dollar may pause or slow in its recovery, but only slightly. But I confess I don't have much confidence in my own projections nor those of anyone else. I don't think anyone knows. There is simply too much uncertainty about too many things.
One other implication of the recent events is that the political landscape has shifted substantially. No longer is national security the driving factor in the election. Our own economic survival trumps foreign policy and defense issues for now. The next President of the United States will be facing some unwanted trade-offs. If the recession continues as expected, there will be great pressure for a stimulus program--usually in the form of extended unemployment benefits, federal spending initiatives, tax breaks, etc., etc. Balancing the budget is going to be next to impossible. And many of the spending plans talked about during the election campaign may be postponed on cutback until we have an economic recovery.
2009 is not looking good from a macroeconomic point of view. If the six to nine month stock market lead holds true, then we could see the equity market begin its recovery by the end of this or the next quarter, assuming a late 2009 recovery. But this is far from certain, and the stock market recovery, whenever it comes, is most likely to be anemic. Huge market crashes often lead to sideways trends, or, at best, years of slow growth in equity prices. An uncomfortable uncertainty shrouds the global economic and financial system for now. This is going to have to play out a bit before we can get a grip on what to expect.
From my perspective, it's batten down the hatches--we're in for a blow! For a while, we can forget about making headway with a benevolent wind at our back. It's going to take all we can do just to stay afloat.
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This article has 14 comments:
If we destroy the dollar, we will wish it will end but it will take generations.
Let the big banks go broke like in 1907. Let the free market work.
Two years of agony and then we are through it. Or two decades of misery to reach the same point AND no lessons will have been learned.
It is OK to go broke in a capitalist society, even if you are a rich member of the power establishment.
Reasonable gas prices (sub $4)
Low interest rates
93% employment rate (7% unemployment)
A fortune to be made for anyone willing to invest in certain stocks at this time.
It doesn't seem that bleak to me, especially when I see 50,000 people at a NASCAR event all spending money on tickets, food, gas and beer.
Of course, I'm no expert and I'm wrong more than I'm right.
Now the US government buying up bad debt at full absorbing all of the loss that has been generated by fiscally irresponsible banks. There won’t be a decrease of value because these homes are being banked and not adding to inventory at a discounted price. Hopefully, the government turns them into rentals to generate income.
Housing will remain unaffordable. First time home buyers won’t be able to purchase homes and the cycle won’t start over again. If you want growth in the market, there will be a need for “long term “affordable loans. “Short term affordable loans” are what got us in to this mess in the first place.
If we continue to loose jobs, outsource jobs and import, the cost of housing will continue to rise only to damage the market further. The money supply will remain tight, there will be no more spending, bankruptcy will increase, business will fail and people will be forced to sell their homes on sites like this www.BuyMyHouseBeforeTh... only making a case for a better economic rescue plan.
What happened to that $700 billion, anyway. This was such an emergency need that surely they must have used a large chunk of it by now in addition to the $400 billion that the Fed send out to foreign banks while Congress was approving the $700 billion. To hear Paulson, Bernanke, and Bush tell it, the banks were all sitting around with their mouths open gasping for air.
In the meantime, we noticed that Federal Reserve Stock holders Chase and Citigroup are going to make out like bandits buying up assets for pennies on the dollar.
Now the headline reads, "Housing must mend to see economic recovery". What was the purpose of the $700 billion?
We weren't born yesterday. Washington was and they have been scammed again. As soon as we replace the Congress members and Senators that voted for this bill next month, we need to raise their salaries to say, $1 million so we can attract some talent to the next election.
ewebsmith.com/finance/...
Moving ahead, we may face the real possibility of a well-developed "shadow economy" that often occurs in the Developing World. In the future we may face difficulty quantifying anything with reasonable accuracy.
There will be no Carpathia to pick up survivors this time.
Those 50,000 people at the NASCAR event paid for it with their credit cards. Feel better now?
Thx,
JB
You sure are a 'glass is half full' kinda guy..... jegan ;-)