Transcript US Economy Forecast 2011, 2012

US Economy
Forecast 2011, 2012
Till Schreiber
College of William & Mary
August 4th 2011
Nafa Annual Convention, Williamsburg, VA
Forecast for 2011, 2012
• What would we like to happen?
– Deficit deal
– Entitlement reform
– Fewer but smarter regulations
– Less uncertainty
– ….
• What’s actually going to happen?
– Not all of that.
Realistic forecast must make
assumptions about some of these factors
• No ideological agenda
• Based on current and historical data, facts
(and some theory)
• Where is the economy now?
• What do some leading indicators suggest
about the near future?
Snapshot of the economy
• Unemployment rate 9.2%
– Little job creation
– Government sector shedding jobs
• GDP growth disappointing
– Less than 2% in first quarter, likely not better than that
for the second quarter
• Economy slowed down by multiple “headwinds”
– Oil (and other commodities) prices
– Supply chain disruptions because of Japan
– Depressed housing market
• Inflation expected to be about 2% each year going
forward
Government spending cuts
• Absolutely necessary over the long term
– Unless you are ok with living in a country like France;
most Americans don’t seem to be
• Big cuts right NOW will slow the economy down
for the rest of the year
– Higher unemployment
– Reduction in growth
– All bets are off, if debt ceiling is not increased. This
would lead to a massive reduction of spending right
NOW
• Assume: Some further cuts this year, no
“stimulus” from government sector
Investment, Investment, Investment
• Main issue of disappointing “recovery”
– Private sector investment fell of a cliff in late 2008,
early 2009
– Has not recovered since to anywhere near normal
levels
Housing Market
• Residential fixed investment (People building
houses, or major remodel/improvements)
– According to latest numbers still only 42% of 2005
level. For every $100 spend on housing construction in
2005, now only $42 are spent.
– Building permits, housing starts, existing home sales,
foreclosures all do not suggest major boom ahead
anytime soon.
• Assume: Housing market continues to be
depressed, at least no major improvement in sight
Business Sector
• You guys!
• High levels of uncertainty
– Regulations and Taxes
– Consumer and Industry demand going forward
• Consumer Confidence Measures still very low
– Down compared to last year
• Purchasing Managers’ Index (ISM)
– Lower compared to April, how temporary are the
“headwinds”?
Hiring
What does this picture mean?
• Even where there are job openings many
businesses take it relatively slow to fill them
• Assume: No jobs miracle likely to be coming
soon from the private sector under current
conditions
Financial Markets
• Reports on Banking and Finance activity
nationwide (Beige Book) show loan demand
as “mixed” or “slightly improved”
• Senior Loan Officer Opinion Survey shows
some (minor) improvements in availability of
credit to businesses nationwide
– Banks state they are mostly held back by an
increased uncertainty of the economic outlook
and a reduced tolerance for risk
Exports
• Still strong growth in China, India, Brazil
– Even larger growth for products pitched at new
middle class
– Chinese apartments with two air conditioners
– Currency manipulation will continue
• Eurozone faces internal issues, so does Japan
• No export boom likely overall
What to make of all this?
• Growth in the second half of 2011 will likely
be at most around 3%, maybe lower.
– Not enough to make major progress in terms of
reducing unemployment; no surprise if rate
remains around 9% over the rest of the year
– Combined with growth of less than 2% in the first
half, overall growth for the year of 2011 will be
below 3%
Forecast for 2012
• Growth should pick up once the recovery really
takes hold
– Has been predicted since late 2009
• Crucial market: Housing!
• No government policies in sight to address
housing market boldly
– Muddling through
• Economist: Housing market now potentially
undervalued in US (based on rent to price ratios),
does not mean has reached bottom
Forecast for 2012
• Households and many businesses are still
paying down debt from the bubble years
– Will continue in 2012
– Debt levels have come down but not nearly to
pre-bubble levels
• “Disappointing” recovery may continue
• Growth of 3-3.5% unlikely to be topped next
year
• Unemployment comes down very, very slowly
Forecast for 2012
• Assumes no major new “headwinds”
• Also no miracles
• Assumes no major policy changes
– Safe assumption for Congress
– Also unlikely that the Federal Reserve will be
willing to do something dramatic
• Forecast consistent with forecast from Federal
Reserve, economists at Goldman Sachs etc.
– Sorry, I am not more cheerful but I have good
company…