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Federal Hall, 26 Wall Street, New York: It was on this site that the US Congresss first met and where George Washington took the oath of office as the first president. Source: Wikimedia Commons
Dr. Peter Morici: It is the season for US economic forecasts, and I
have been polled by several published surveys. Like other forecasters, I see
growth too weak to create enough jobs to pull down unemployment - - private
sector jobs could even stagnate. The risk of a double dip is at 50 per cent. If
that happens, the economy likely will stay down for many years.
Growth:
Generally, the outlook is for mediocre growth—a tad less than 3 per cent—and far
less than the 4 to 5 per cent needed to appreciably dent unemployment. President
Obama should not boast progress from the recent decline in the unemployment
rate, because a good deal of that was accomplished by folks throwing up their
arms and quitting the labor force—unemployed adults that stopped looking for
work altogether.
Retail sales are weakening, despite a lift from lower gas prices. This indicates
second quarter growth in consumption, which is about 70 per cent of GDP, is
slowing from its modest first quarter pace.
Second quarter investment will get a lift from a
modestly stronger manufacturing sector, especially in autos and technology
related equipment. Bell weather Intel reports strong sales for the enterprise
applications—businesses have finally followed consumers in updating essential
hardware. Otherwise investment will take a hit from much weaker new home sales
and construction—the nation has a serious overhand of housing units that will
take some years to work off. Third quarter housing construction should improve,
and the recent dip in sales is an overreaction to the end of the home buyer tax
credits.
Overall, the federal policymakers’ policies have few arrows left in their quill.
Federal stimulus spending remains controversial and unlikely to expand because
voters are wary of more deficits and borrowing (which must come from the Middle
East and China), and Christina Romer continues to issue outrageous, ill-founded
claims that the stimulus package is generating up to 3.5 million jobs—eroding
President Obama’s credibility.
Moreover, thanks to Rahm Emanuel and Nancy Pelosi, the $787 billion stimulus was
structured to maximize the president’s image with environmentalists and pay off
constituents. Jobs creation was a secondary consideration. Obama got what he
paid for—love from the left and too few jobs for middle America.
The Federal Reserve cannot lower short term rates—those are already at near zero
levels—and it is doubtful that new purchases of mortgage backed securities would
do much. Mortgage rates are already very low. The overhang in the supply of
housing requires that any immediate gain in construction and jobs accomplished
by further subsidizing housing purchases, through tax credits or Federal Reserve
intervention, will only borrow from sales and construction from a quarter or two
into the future.
The Treasury has forsaken the third tool of monetary policy—exchange rates—by
letting Beijing enforce an undervalued yuan.
The trade deficit is a huge drag on the US economy—creating a growing hole in
aggregated demand. It is a primary reason, along with the Administration’s lack
of comprehensive action to address the woes of the 8000 regional banks, the
economy cannot accomplish growth of 4 or 5 per cent, as it should when emerging
from a recession.
The deficits on imported oil and with China account for nearly the entire
imbalance. The president’s energy policies do not fully exploit, by some long
and considerable measure, the potential to substitute domestic energy for
foreign oil. The President’s failure to accomplish genuine exchange rate reform
in China mean that the US will face a long period of mediocre growth that will
only further increase the national debt, with too much held in China.
Unemployment will stay alarming high.
Double Dip?: The preponderance of risk in my forecasts and those
of my colleagues—the consensus of which are fairly similar to mine—are to the
downside.
China keeps saying it is preparing for slower growth but its exports keep
rocketing with the missiles landing in the United States. Much of China’s labor
strife and consequent higher wages are concentrated in the factories of foreign
invested companies. It seems now that Honda has taught Chinese engineers how to
make cars, Chinese automakers through government influence on unions are
establishing a two-tiered wages structure—high wages for foreign companies and
lower wages for domestics. Not surprisingly, this has drawn comment or attention
from the ever apologetic for China US Treasury or broader US Administration
The chances of a double dip recession are at about 50 per cent. If the EU patch
for Greece and others holds and the US trade deficit does not jump too much,
then the economic expansion will continue in the United States, affected but not
derailed by troubles in Europe. If Greece reschedules and sets off a sovereign
debt contagion, all bets are off, grab a helmet and head for trenches. The same
applies if President Obama’s ill-conceived drilling bans and excessive emphasis
on low-yield alternative energy sources and conservation options, and its
continued tolerance of Chinese mercantilism, result in a jump in the trade
deficit.
It simply would not take much to knock the US economy off track.
The only thing that is certain is that President Obama and his economic team
will reference the mess left by President Bush and assume no responsibility for
making things worse by a combination of all too political economic and energy
policies and ill-advised actions on energy and China.
Stock Market: If US growth continues near three per cent, the stock
market will recover and reach new highs—the Dow will rocket to 13,000 sometime
in 2011. I remain bullish, because 3 per cent growth plus strong growth in
China—even if only 8 per cent—is enough to boost the balance sheets and enhance
the fundamentals under major US stocks.
If growth languishes between 1.5 and 2.5 per cent, equities will recover but that
is about all. I don't see growth at less than 1.5 per cent without a wholesale
derailing of the recovery.
To some considerable measure the outlook is binary--the patch in Europe holds or
it doesn't.
Quarterly Forecasts (per cent)
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Q112
2010
2011
2012
GDP: Annual
2.4
3.2
2.8
2.8
2.8
2.8
2.8
2.8
3.1
2.9
2.8
CPI:
Year/Year
1.8
1.3
1.3
1.7
2.5
2.8
2.9
2.9
1.7
2.5
2.9
Core CPI: Year/Year
1.0
1.1
1.2
1.7
2.0
2.1
2.1
2.1
1.1
2.0
2.1
Unemployment Rate
9.6
9.7
9.6
9.5
9.4
9.3
9.2
9.1
9.6
9.2
8.8
Federal Funds Rate
0.125
0.125
0.125
The US
economy is facing a clear slow down with data in the third quarter set to be
worse than in the first quarter, says Dariusz Kowalczyk, senior economist &
strategist at Credit Agricole. But he tells CNBC's Martin Soong, Karen Tso &
Sri Jegarajah that he's not expecting a double dip:
Peter
Morici,
Professor, Robert H. Smith School of Business, University of Maryland,
Giles Keating, global head of
research at Credit Suisse, expects the global economy to slowdown in the second
half but he rules out a double-dip recession in the US. Keating speaks to CNBC's
Martin Soong, Karen Tso and Bernard Lo:
