Where is the Economy Going? It is not Growing, not producing recovery, we are worse off now than before. The report is below.
Most people instinctively feel the economy is not
doing well. They see the near 10% unemployment
rate, lackluster business results, mixed stock market
returns and other indicators. What do the coming
months hold for the economy?
Let’s take a look at the recent past:
Consumer confidence /demand / Total demand is low.
The average American balance sheet is much worse
now than it was just 3 years ago. Their investment
portfolio is perhaps 20% lower than it was. Their
home may be worth 20% less on average than it was
4 years ago. They may have a job that is insecure with
uncertain salary growth, or they may be unemployed.
Their net worth is lower, and their debt is a higher
proportion of their assets, (or they may be a net
debtor). Of course, they are trying to rebuild their
balance sheets, primarily by being very cautious
For businesses, since the beginning of the recession
in Q4 of 2008, which began with a huge shock to the
system, business performance has tread water for the
most part. GDP has barely returned to its’ 2007
level*. Most businesses are performing modestly at
best, with very modest growth levels since 2008 on
average. A recent survey by the NFIB** showed most
of their indicators at neutral or negative readings.
Most other business forecasting indices are not much
better. Most business balance sheets have
deteriorated along with their earnings since 2008.
Credit/Capital markets have not returned to normal.
Some businesses are having trouble raising capital.
Small businesses and especially new businesses are
reporting a much harder time getting funds. But even
given this, many businesses report they don’t want to
borrow funds, as they do not have adequate
demand/revenue to justify and pay them back.
Of course the Fed has flooded the banking system
with funds through low/zero interest rate borrowing to
the banks. And the federal government has spent
billions through the stimulus package. Of course,
besides this being good for the banks themselves,
this has really only trickled down to large businesses,
if any. The stimulus funds have been primarily used to
keep state and local governments going, which may
be better than the alternative, but has done close to
nothing to advance investment in business.
Given this, what do the coming months hold?
I predict very low positive growth over the coming
months, with GDP in the 1 or 2% range through the
rest of 2010. This will slowly build to a more robust
recovery in 2011. The stock market will grow by a few
percent the rest of this year. Unemployment will slowly
edge down, ending the year close to 9.0%, not
returning to more normal levels (6-7%) until the end of
2011 or 2012. Of course, the federal budget deficit is
increasing at an alarming pace. Given current
deflationary pressures, I don’t believe it’s a huge
problem now, but government inflows/outflows will
need to be brought closer in line as the country comes
out of recession or that will jeopardize any recovery in
* In all of 2009, nominal GDP was essentially zero,
although it rose to 5.7% in Q4. It decelerated in Q1
2010 to 2.7%, and the forecast for the remainder of
2010 is lower.
Nominal US GDP declined 1.9% in 2008, the biggest
decline since 1946. It had previously risen 2.1% in
2007, which was already anemic.
** National Federation of Independent Business
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