Autumn View

Written by Jeff Thredgold, President, Thredgold Economic Associates

September 14

The American Economy
…confidence is lacking
Most forecasting economists will tell you that the U.S. economy returned to growth about 12-15 months ago…statistically at least, if not emotionally.  The National Bureau of Economic Research, the “official” scorekeeper for the American economy, is expected to make that call at any time in coming months.  We do know that what we now call the Great Recession started in December 2007.

Even as U.S. economic growth has returned, its pace has been weak…and moving in the wrong direction.  A reasonably solid growth rate during 2009’s final quarter gave way to the lackluster pace of the April-to-June period.  Why?  In my view, American businesses and consumers maintain spending close to the vest as they are extremely wary of the enormous and costly expansion of government now underway.

Talk of a possible “double dip” recession has declined in recent weeks as more economic data supports the slow growth scenario.  In addition, views of a more vibrant economic expansion are also muted as the “headwinds” of weak residential and commercial real estate values, high unemployment, and low confidence levels take the bloom off the economic rose.

Deficit Spending 
…the record books
Unconscionable budget deficits exceeding $1,000,000,000,000 annually are in store in coming years.  Even larger deficits were the norm in fiscal years 2009 and 2010, with a slightly smaller deficit projected for 2011.

You cannot tax your way to balanced budgets.  Nor can you tax your way to economic prosperity.  Valid moves toward deficit reduction must focus on slowing the growth rate of future government spending, particularly in the entitlement area.

Global financial market anxiety focused on the ability of southern European nations to ever repay their national (sovereign) debts could eventually find its way to concerns about enormous U.S. government debt levels.  The most serious challenge facing this nation is found right here.

Mid-term Elections
…staying too long
The political party outside of Congressional control typically adds to its seat count in such elections.  This year is also expected to see a surprising number of long-term incumbents from both parties sent home.  Bragging rights about power and the ability to deliver pork to constituents used to be a major incumbent advantage…no more. 

Republicans expect to pick up a substantial number of seats in the Congress, with more optimistic forecasts suggesting the party could regain control of the House of Representatives.  Some even talk of major gains…and possible control…of the Senate.

Employment
…weak and weaker
The current rate of U.S. job creation has made only a modest dent in the more than eight million jobs lost in 2008 and 2009.  To make matters worse, the U.S. economy needs to add roughly 130,000 net additional jobs each month just to meet the needs of a growing population…and to keep the nation’s unemployment rate from rising.

The nation’s jobless rate has averaged 9.7% so far this year, with only limited prospects of any major downward move before the end of 2011.  Major business anxiety about the expansion of government and higher taxes will limit major employment gains anytime soon.

Tax Hikes?
…the job creators
The desire of the Administration to maintain the Bush tax cuts for the majority of U.S. income earners is to be commended.  However, tax rates in place should also be maintained for those making over $200,000 annually.  Like it or not, these are primarily the people who invest and create jobs.

Inflation…or Deflation?
...pick your poison
Inflation pressures have diminished throughout 2010, with the Consumer Price Index rising a modest 1.2% during the latest 12-month period.  Low inflation is likely during 2011 as well.

Where we go from there remains the subject of intense debate.  As before, 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
…remaining on hold
The most critical of all short-term interest rates—the federal funds rate—has been at a 97-year-low range of 0.00%-0.25% for 21 months.  Most forecasters see the rate remaining unchanged well into 2011.

One view gaining additional footing in some circles is that the Fed should push its key rate somewhat higher in coming quarters…to perhaps 2.00%-3.00%...to lead other short-term interest rates higher.  The reason?  To provide net savers, including millions of retired people, a chance to boost their investment returns from savings accounts, certificates of deposits, and money market funds.  Millions of retirees have seen their interest income—and their ability to spend—slashed in recent years.

Long-Term Rates
…time is now
Thirty-year fixed-rate mortgages on conventional loans have been below 4.50% in recent weeks, near a 50-year low.  It remains a very attractive time to refinance a mortgage or to finance a new home or foreclosed property.

At the same time, nearly one in four U.S. homeowners is “underwater” on their mortgage…owing more than the home is worth.  Many mortgage lenders have tightened credit standards or had onerous new regulations imposed on them by government bureaucrats.  Mortgage rates could move higher later this year.

The Global Economy
...led by Asia
The global economy returned to growth mode in late 2009, following its first recession since just after World War II.  Growth prospects remain reasonably solid, led by Asia.

China again enjoys powerful growth, led by strong export gains and massive internal spending.  Anxiety about loan quality is high.  India also enjoys solid growth, while Japan continues to languish.

European growth is modest at best, although Germany has performed well.  Russia struggles with low business confidence and high levels of corruption.  African and Middle Eastern growth remains solid.  South America records positive growth, with rising optimism about the powerful Brazilian economy.

Mexico’s vital tourism sector remains under pressure, tied to almost daily stories about incessant drug trafficking violence.  Canadian growth has slowed from its earlier solid pace.

The Bottom Line?

Sluggish U.S. economic growth remains likely, with no shortage of serious domestic challenges.  Modest global growth also remains on tap.