Lilguy

2009 Economic Forecasts Ignore Demographic Shift

Good insights and "guess" about 2009. My bottom line is about the same as yours--minus 5% GDP next year--but I see it declining more slowly, yet longer--at least through 3Q and probably year-end 2009. Why?

--Home values will continue to deline--probably another 10-20%--as mis-directed efforts to stabilize prices continue to fail. Banks still won't lend to well-qualified buyers no matter how low rates go.

--Foreclosures will continue to grow at an accelerating rate across mortgage types as more households lose jobs, and many just walk away.

--Banks worldwide will continue to contract as they write down another trillion dollars in bad, highly leveraged debt. The Fed will pump more money into them by every means possible, but the money will just disappear as the banks reserves are eaten by the bad debt.

--Unemployment (official U3, which captures only about half of reality) will sail passed 10% (the number the incoming Obama team is projecting) to 12% as retailers, auto dealers, and many others in retailing of all varieties lay off workers and many go into bankruptcy.

--Tax rebates, credits, and other early efforts to stimulate the economy will go to savings or paying off outstanding debts, not new purchases. Infrastructure investments will play no role in the stimulating the economy in 2009 given the lead time to get organized.

--The global economy--trade and finance--will slow more than America's, curtailing US imports and exports as well as incoming and outgoing private direct investment. This will have a greater impact on GDP than most people now imagine.

In short, 2009 will suck. If we're lucky, we'll reach the bottom by the end of the year. Hopefully, 2010 will be better.

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