Colorado Economic Outlook Summer 2010
Written by Jeff Thredgold, President, Thredgold Economic Associates
The U.S. Economy
…a three quarter stretch
The American economy has now registered reasonable growth for three straight
quarters, following four straight quarters of 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 2.7% real (inflation adjusted) annual growth rate during 2010’s first quarter
is slightly weaker than 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 dealt with 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 control in Washington to strengthen its
hand in such elections. The major departure from the past 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 roughly one million jobs so far in 2010, with perhaps
another million more to come prior to year-end.
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.
…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 increase compares to
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 has
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 buy a new home or foreclosed property
or to refinance, 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
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
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…election surprises…better employment news…modest
inflation…extremely low short-term and attractive long-term interest rates…and
an anxious global economy.
Wouldn't It Be Nice If...
…there was a stronger collective effort to improve opportunities in
America’s inner cities
…our 401(k) balances would continue to rebound nicely in coming years
…some of the mind-boggling research advancements in energy production
and alternative energy soon made their way into the economy
…Wall Street “high rollers” had greater legal and financial
accountability for the financial market abuses of recent years
…our kids realized sooner that Mom & Dad might actually know what
they are talking about
…more working people would save seriously for their Golden Years
(an estimated one-third of the U.S. population saves zero for retirement)
…men and women were from the same planet
…“government” would recognize that it is there to serve
the people, and not the other way around
…American corporate and consumer confidence would rise solidly in coming months
…America’s Vietnam War veterans would finally get respect for
serving their country
…incompetent corporate CEOs who drive companies into the ground were
not rewarded with multi-million dollar “golden parachutes” to simply go away
…Johnny Carson was still king of late-night TV
…there were less irritating ways to bring buyers and sellers together
than junk mail, spam, pop-up ads, telemarketing, and endless TV commercials
…“old fashioned” common courtesy between people made a big
…American military personnel could see their families more often
…we would all get more involved in enriching the lives of those less
fortunate than ourselves
…the Congress would soon get serious about reining in the growth rate
of entitlement programs in coming years. Note: In regard to Social Security, M
edicare, and Medicaid…we do not have to cut spending…we have to slow
down the growth rate of future spending…BIG difference!
…America’s silent majority (our parents and grandparents) received
greater respect for the enormous wartime sacrifices they made to help protect the
freedoms we all enjoy today
…“far left” liberals and “far right” conservatives
would back off a bit
…U.S. firefighters, police officers, and military personnel received our
respect ALL of the time
…our presidential campaigns were much shorter and less exhausting…for
candidates AND voters
…we could benefit more from years of practical business experience of millions
of retirees, rather than simply “putting them out to pasture”
…each long-term member of Congress was required to take a year off, start a
new business with limited funding, meet a payroll, and then deal with the complexities
and hassles THEY have created
…your garbage disposal didn’t eat better than two-thirds of the
…many spoiled and pampered athletes in MLB, the NFL, the NBA, and the NHL
had to get regular jobs at regular wages (at least for awhile)
…solid Mexican economic growth would provide more good jobs at home
…we didn’t have a $13,000,000,000,000 gross national debt, and we
weren’t spending over $1,000,000,000 DAILY just to pay the INTEREST on that debt
…teachers received more admiration and respect from students and their parents
…we would all keep in mind that despite the problems and challenges we face in the
U.S., this is still one of the greatest countries in the world