Economic Outlook for 2009
Predictions for the American economy are all over the map. The most optimistic prediction I see calls for the first half of 2009 to continue its decline, with unemployment reaching 7-8% by the end of June. Recovery will begin in the second half, and the economy will end the year with a net growth of 1% to 1.5%.
A less optimistic outlook sees the decline continuing until the third or fourth quarter of the year, with net growth for the year as at or near zero and unemployment reaching as much as 8% to 9%, with even 10% a possibility.
The most pessimistic projections see the recession lasting through the entire year, with the highest level of unemployment reaching from 10% to 12%. A few of the pessimistic school see an even more protracted downturn, lasting as long as to 2011. This group sees negative growth for all of 2009 and even through 2010 in some cases.
Breadline in N.Y. in 1930
I don’t pretend to know how this will play out. I have no experience with an economy such as we find ourselves in today. We had bank failures in the 1930s depression, but they were not like those of today, where the loan base of our largest banks was over-valued to unprecedented levels. The final analysis of today’s crisis is that many American banks, including all the giants, need massive recapitalization. The problem is, with the economy in a tailspin, investors with the capital to spend are in no mood to trust the banks. When the same fools who got us in this situation are still calling the shots, it is not hard to see why there is a low level of trust among potential investors.
There is no doubt in my mind as to the seriousness of our situation. Our economy is in a free fall for now, and there is nothing in place that is going to stop the fall. Paul Krugman, Nobel Prize winner in economics for 2008, phrases it this way:
“The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.” (NT Times, January 4, 2009)
The only thing on the horizon that promises some relief is the stimulus (or recovery) plan of the incoming Obama Administration. It promises up to $1 trillion in new federal spending, and, from the looks of it, it needs to be that much. Mr. Krugman’s concern is that the size of the package will be resisted by a Republican minority forcing a delay in its passage and possibly a reduction in size. Either of these scenarios would be hurtful for the economic recovery.
A reduced package could result in a slowed down recovery, or, even worse, simply a reduction in the rate of our fall. In other words, the worst case would be a recovery package too small to stop the fall.
The fear of a continuing fall is not out of the question. If deflation becomes a problem, it feeds on itself. Purchases by businesses and consumers are put off, since falling prices encourage waiting for lower prices. This causes businesses to cut production even more, resulting in more unemployment and even lower spending ahead. This type of self-perpetuating spiral is, indeed, a fearful prospect. If left unattended, it could take years, even a decade, for the economy to self correct and begin a recovery.
Feeding on this scenario are some serious barriers to a fast recovery. Economic expansion is being held back by four major factors:
1. Home prices and investment values are falling. Both of these tend to retard spending, as the reverse of a wealth effect, meaning that when households feel less wealthy, they tend to cut back on spending.
2. Declining employment opportunities. Jobs are the major source of income for Americans. When there are fewer jobs, there is less spending. With an increasing level of unemployment, it causes spending to fall and optimism to turn to pessimism.
3. Declining sales to foreigners. With the world-wide recession in play, other countries are also feeling the pinch, and they cut their demand for products they buy from other nations. In the United States, our largest exports include airplanes, computers, wheat and corn. All suffer when there is a global downturn. Producers of these goods in America will feel the pinch, cutting back on production and employment.
4. Business inventories and expansion will continue falling as long as there is insufficient demand for new products. That is where we are now, and both inventories and new plant and equipment spending are expected to be cut back as long as there is low consumer demand.
The economy needs a huge infusion of spending to off-set these tendencies, and the spending of last resort is the government. The federal government, in particular, can issue contracts to build new roads, schools, hospitals and more. This will put income into the economy, and it will increase the level of optimism in the job market. It can be the major player in a recovery. We need a big dose of this remedy now. I encourage everyone to get behind a quick enactment of the recovery program. It could make the difference between the first and last scenarios shown in the earlier paragraphs. 7-8% unemployment is not a killer. 10-12% is! We need to put a cap on this destroyer of economies, and we need to act soon.
