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With advanced degrees in both economics and finance, I place great deal of importance upon macreconomic developments and fundamental analyses of industries and individual companies In typical markets, I seek out investment themes which offer compelling reasons to invest in a group of like... More
  • We May Have Problems With CBO Forecasts 0 comments
    May 11, 2009 3:31 PM


    We have had on more than one occasion the time to discuss the likely impact of the financial crisis and the ensuing recession on household balance sheets; there is a working consensus the consumer will need to repair household balance sheets by saving more and spend less during the imminent recovery.
    Just a minute or so ago I was catching up on some reading and noticed something in the WSJ reprinted/summarized from the Economist dealing exactly with this subject. I have pasted this below but the bottom line is that it is entirely possible that real consumer spending will need to grow a rate of 1.3% through 2013 to bring savings into line........something that was not elaborated upon or made clear.
    Then it occurred to me it would interesting to see what the Congressional Budget Office is using in its forecasts recently revised in March; based upon this data, the CBO believes real growth in GDP will be 2.9% in 2010, 4.0% in 2011 and 3.6% for the years 2012-2015. These forecasts are incompatible inasmuch as consumer spending accounts for approximately 70% of GDP; they could only be compatible if there were parabolic increases in private investment, an unlikely prospect.
    Given this disconnect, there is really only one conclusion to be drawn: the CBO should revisit its underlying budget assumptions and plan on yet larger deficits and raising authorized borrowing limits for Treasury. The material taken from the Economist is pasted herewith:

    The Economist writes about the American consumer’s struggle with debt. “A more enduring restraint will be the pressure on consumers to reduce their debts to more manageable levels relative both to income and to the much lower value of their homes. This effect is difficult to quantify, since so many factors determine consumers’ preferred saving rates and levels of debt: assets, retirement goals, expected income, risk tolerance, access to credit, age, and so on. Some bearish analysts argue that debt ratios and saving rates ought to return to their levels of the early 1950s, but others reckon it would be enough to go back to 2000 for households to feel comfortable with their debts again. This process, known as deleveraging, requires consumption to grow more slowly than income in coming years. A sudden rush to return debt ratios to where they were in 2000 would require ridding households of some $3 trillion in mortgage debt—an almost impossible task. More probably, mortgage debt will grow more slowly than income through a combination of lenders writing off impaired loans, homeowners paying down existing mortgages and new homeowners taking out smaller mortgages than in the past. Bruce Kasman of JPMorgan Chase estimates that the most dramatic phase of increased saving has already occurred, and spending will grow only a bit less than income. But Martin Barnes of BCA Research, a financial-forecasting service, is more pessimistic. For debt to return to a more sustainable trend, real consumer spending would need to grow by just 1.3% a year from 2009 to 2013, the weakest such five-year stretch since the 1930s. It could grow even more slowly than that if taxes rise faster, he reckons, or if stagnant productivity impedes real-income growth

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