Lookin Back — Lookin Forward
Written by Jeff Thredgold, President, Thredgold Economic Associates
Calendar year 2010 was quite an emotional ride, with numerous unprecedented events taking place. Let’s hope 2011 is a bit tamer, even as U.S. economic performance is likely to improve.
2010’s list included mind-boggling government stimulus and associated budget deficits around the globe…enormous financial pressure on Southern European nations to get a handle on government spending and national debt…a devastating oil spill in the Gulf of Mexico…solid gains in U.S. stocks…volatile and extremely low long-term interest rates, even as short-term interest rates remained at historic lows…a “flash crash” in May that saw the Dow nosedive by nearly 1000 points in a matter of a few minutes (scaring investors to death)…a major Republican surge in November to gain control of the House of Representatives…and an agreement to extend the 2001 and 2003 tax cuts for all taxpayers for the next two years…
A Decent Forecast
Despite all of these shocks and boosts to the U.S. economy, the consensus view of forecasting economists a year ago was—for a change—quite close to the mark. I am a member of four national forecasting panels, including those of USA TODAY and The Associated Press.
Looking back at my own forecasts, as well as the consensus view, the overall expectation of U.S. economic growth near a 2.5-3.0% real (after inflation) annual rate was just a tad high. Forecasts of inflation also came in a bit high. Forecasts of high unemployment were on the mark. The consensus view that the Federal Reserve would begin to tighten monetary policy late in the year proved much too early, with most forecasts now expecting short-term rates to remain at historic lows during most or all of 2011. I have been, and remain, optimistic for stocks.
The consensus view never called for the traditional strong surge of U.S. economic growth following the Great Recession, noting numerous obstacles to growth including weak residential and commercial real estate markets, high unemployment, weak consumer and corporate confidence, and anxiety about massive government spending and projected $1,000,000,000,000 annual budget deficits for as far as the eye can see. The consensus view also never shifted to the “double dip” recession view of some forecasters.
That Broken Clock
Note: Various economists at the extremes were, as usual, wrong. Without naming names, one economic “doomsdayer” a year ago talked of “the collapse of the dollar” during 2010 and “panic will be the order of the day.” Another suggested that “2010 is the year when the bear market in stocks returns with full force” and “devastating deflation” is in order…
I have a bone to pick with their constant negativity. A few “doomsday” forecasters were more accurate in 2007 and 2008 when their constant forecasts of economic disaster were closer to the mark. They always call for economic disaster! Even a broken clock is right twice a day.
Yes…the consensus of forecasting economists (including yours truly) did not foresee the Great Recession. The consensus saw a more traditional economic recession, tied in part to excesses that had developed in financial and housing markets.
The American economy is improving. Political shift in Washington DC and an extension of the Bush tax cuts helped reduce corporate and investor anxiety about what tomorrow holds.
There is clearly…and hopefully…a greater willingness to lessen or reverse the enormous expansion of U.S. government spending of the past two years. There is a greater willingness to slow the growth in future government spending…including slowing the growth rate of entitlement spending…in order to restore financial sanity in the nation’s capital.
However, talk is cheap. When push comes to shove, tough decisions have to be made. As I have noted frequently, political support for tough decisions would be far easier if members of the Congress would stop talking about spending cuts and call it what it really is…slowing the growth rate of future government spending.
The Debt Ceiling
A key political battle will emerge in coming weeks. Republicans will largely refuse to increase the nation’s $14.3 trillion debt ceiling unless and until significant agreements are reached with the Administration and the Senate to rein in government spending.
Yes, this is similar to refusing to pay a credit card bill after using it frequently. But such a battle could serve the nation well if it leads to slower government spending in coming years.
The new Republican-led House, as well as a stronger Republican minority in the Senate, will also try to repeal the President’s spend-heavy health care program, known to it critics as “Obamacare,” described by The Wall Street Journal as “the worst bill ever.”
While the votes are not likely there to result in repeal, or if it does succeed to override a likely Presidential veto, the Republican-controlled House does have the ability to deny funding for various program components.
A Stronger Economy
The American economy is showing more signs of reasonable vibrancy, with stronger-than-expected economic reports becoming the norm. Consensus growth forecasts for 2011 are at a 3.0%-3.3% real growth rate, versus the likely 2.6% or so growth pace last year (final data is not yet available). More optimistic forecasts exceed a 3.5% pace.
The same economic improvement issue was also true a month ago, only to be shot down by a much-weaker-than-expected employment report for November, with only 39,000 net new jobs created and a higher unemployment rate. The financial community expects to see the addition of roughly 143,000 net new jobs (in December) in data to be reported on Friday, January 7, with no expected change in the unemployment rate.
A major theme in 2011 will be to what extent job gains in the private sector can offset expected job declines at the state and local government level, where budget pressures will remain front page news. Another theme will be any type of resolution of the European debt crisis and to what extent economic growth might slow in China.
The “dismal science” of economics and forecasting the future remains fascinating, if also humbling. As a former banking colleague of mine, Todd Zagorec, noted years ago, “it’s high time economics was given the respect and status it deserves alongside all the other occult sciences.”
This week begins my 36th year of writing a weekly economic & financial newsletter. Maybe someday I’ll get it right.