Written by Jeff Thredgold, President, Thredgold Economic Associates
The U.S. Economy
…a three quarter stretch
The American economy has now registered a reasonable growth pace for three straight quarters, following four straight quarters of economic decline. Constraining a more impressive economic growth rate are sluggish residential and commercial real estate valuations and soft demand, historically high unemployment, and consumer anxiety about ever-expanding government and mind-boggling budget deficits.
A 3.0% real (inflation adjusted) annual growth rate during 2010’s first quarter largely mirrors the consensus view of forecasting economists for growth over the balance of the year. Numerous forecasts have been downgraded slightly in recent weeks, tied to European financial challenges.
Before the end of the year, the National Bureau of Economic Research (NBER), the official scorekeeper for the U.S. economy, is likely to determine that the Great Recession ended sometime between June and September of 2009. The Great Recession—which started in December 2007—will be the longest, deepest, most painful, most costly and most pervasive recession since the Great Depression.
…simply too much borrowing
Financial realities tied to the Great Recession, combined with aggressive spending by both the Bush and Obama Administrations to stabilize the economy, contributed to a budget deficit of $1.4 trillion during fiscal year 2009, which ended last September 30, easily the largest on record. A comparable deficit is likely this fiscal year. Since few minds can comprehend such enormous numbers, think instead of a budget deficit averaging $160,000,000 EVERY 60 minutes.
Perhaps the greatest challenge to be addressed over the next 12-24 months is how to reduce estimated deficits averaging $1 trillion annually during the next eight years, which are simply unaffordable. Global financial anxiety about irresponsibly high budget deficits across southern Europe must be a wake-up call to the U.S. Congress as well.
…the curse of incumbency?
Republicans expect to pick-up substantial numbers of seats in the U.S. Congress in November’s elections. More optimistic forecasts even suggest the Republicans could gain control of the House of Representatives.
It is typical for the party out of Congressional control to strengthen their hand in such elections. The major departure from the past, as noted frequently during the past year, is likely to be the surprising number of long-term incumbents from both parties who could be sent home. Voters have clearly tired of the childish behavior to be found on both sides of the aisle in the nation’s capital. Critical long-term issues simply must be addressed in a bipartisan fashion…and sooner rather than later.
…job challenges for millions
For the first time since the Great Depression, total job losses during a recession wiped out total employment gains during the prior expansion. More than eight million people lost jobs during 2008 and 2009, with millions more shifted involuntarily to part-time employment. Much better news finds the net addition of more than one-half million jobs so far in 2010, with perhaps another one million more to come prior to yearend.
The nation’s unemployment rate, averaging 9.8% over the past six months, is likely to remain above 9.0% during the next 12 months, even as job gains have returned. Why? As more evidence of job availability becomes widespread, hundreds of thousands of people who formerly left the labor force will continue to return…and unless and until they find a job, they will be counted as unemployed. In addition, hundreds of thousands of jobs in construction and manufacturing are lost for good.
…a 44-year low
Consumer inflation remains under control, with the Consumer Price Index rising 2.2% during the most recent 12-month period. The rise largely matches the 2.3% average annual rise during 2006 to 2009. In addition, “core” consumer prices (which exclude food and energy costs) rose only 0.9% during the most recent 12-month period, the smallest rise in 44 years.
Where we go from here remains the subject of intense debate. One view sees major inflation pressures about to unfold, resulting from highly aggressive monetary policy and massive budget deficits. The other major view sees a Japanese-style deflation unfolding in coming years, tied to weak residential and commercial real estate values, strong productivity gains, major slack in labor markets, and anxious consumers.
The Federal Reserve
…on hold for now
Since mid-2007 the Fed has implemented a series of programs to help address the paralysis that has, too often, hampered global financial flows. The Fed’s and other major central banks’ success in “exiting” these steps during the next 18 months will be critical to keeping inflation under control.
The federal funds rate, the most important of all short-term interest rates, has been at an all-time low of 0.00%-0.25% since December 2008. European financial stress suggests the Fed will delay the time when it begins to push this rate higher, probably until 2011’s first half.
Long-Term Interest Rates
…don’t wait too long
Global anxiety about massive government debt levels in southern Europe have pushed scared investors into U.S. government securities. The surge in demand has pushed bond prices higher and investment returns (yields) lower. Correspondingly, rates of 30-year fixed rate conventional mortgages have moved slightly lower.
It remains a very attractive time to refinance a mortgage or buy a new home or foreclosed property, while recognizing that one in four U.S. homeowners is “underwater” on their mortgages…owing more than the home is worth. Mortgage rates could move higher later this year if global investor anxiety declines.
The Global Economy
…a focus on two
Overall global economic growth returned during 2009’s final few months, led by an Asian rebound. For now, two stories dominate the outlook for the global economy….Europe and China.
The ability of wealthier European nations (such as Germany and France) and the International Monetary Fund to alleviate investor anxiety about massive debt levels of Greece, Portugal, Spain, etc. will be critical to the future of the euro currency, as well as the European economy. Regaining investor confidence is mandatory.
At the same time, steps by China’s political leadership to slow this behemoth’s economy down are underway. Whether such steps can be successful, while avoiding a real estate bust, will go a long way to determining Asia’s near-term economic future.
The Bottom Line?
The Great Recession has given way to a reasonable U.S. economic growth pace, although serious challenges remain. We also expect…unprecedented budget deficits in coming years…better employment news…modest inflation this year…extremely low short-term and attractive long-term interest rates…and an anxious global economy.