2010: economic predictions

“We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter…. My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely…. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time.”
– Ben Bernanke, November 16, 2009

“Nobel Prize-winning economist Paul Krugman said he sees about a one-third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade. ‘It is not a low probability event, 30 to 40 percent chance,’ Krugman said today in an interview in Atlanta, where he was attending an economics conference. Survey of Economists Krugman’s forecast is more pessimistic than the median estimate of 58 economists surveyed by Bloomberg News in early December, which called for a 2.6 percent expansion this year following a 2.5 percent contraction in 2009.
– Paul Krugman, January 4, 2009

“I think the U.S. will avoid a double dip recession, and 2010 GDP growth will be in the 2% to 3% range.”
– Calculated Risk, January 1, 2010

“Based on my reading, here is what I conclude the consensus views are as we head into 2010: Muted recovery, but positive growth, for sure! No risk of a ‘double dip’…. So here we are with a glorious opportunity to reintroduce Bob Farrell’s Rule 8: “When all forecasts and experts agree, something else is going to happen.”
– David Rosenberg, December 17, 2009

“Yun predicted that home prices will rise by 4 percent, while home resales, which are expected to reach 5 million this year, will surpass that level in 2010, hitting 5.7 million. Average mortgage rates will average roughly 5.7 percent, he said.”
Lawrence Yun, National Association of Realtors, November 13, 2009

“The U.S. economy next year will turn in its best performance since 2004 as spending perks up and companies increase investment and hiring, says Dean Maki, the most-accurate forecaster in a Bloomberg News survey. The world’s largest economy will expand 3.5 percent in 2010, according to Maki, the chief U.S. economist at Barclays Capital Inc. in New York.”
– Dean Maki, Barclays Capital, December 28, 2009

“Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, who was No. 1 among forecasters of GDP during the 12 months through June 2009. Hatzius, 41, estimates the economy will expand 2.4 percent in 2010…. Hatzius and the economists at Goldman Sachs project the unemployment rate will average 10.3 percent next year, compared with a median estimate of 10 percent for 58 responses in this month’s survey.
-Jan Hatzius, Goldman Sachs, December 28, 2009

“Neal Soss, 60, chief economist at Credit Suisse in New York projects the economy will grow 3.3 percent next year.”
– Neal Soss, Credit Suisse, December 28, 2009

“John Lonski, 58, chief economist at Moody’s Capital Markets Group in New York, was No. 3. He sees a 2.7 percent expansion.”
– John Lonski, Moody’s Capital Markets Group, December 28, 2009

“Robert MacIntosh, chief economist at Boston-based Eaton Vance Management forecasting growth of 3.5 percent, and that the jobless rate will average 9.5 percent.”
– Robert Macintosh, Eaton Vance Management, December 28, 2009

“Roubini sees a greater chance of a U-shaped economic recovery in developed economies, with a 20 percent to 25 percent chance of a double-dip.”
– Nouriel Roubini, October 11, 2009

Here are seven predictions concerning economic-related events I expect to see by December 31, 2010:

1. The BLS will report U-3 unemployment to be in excess of 11 percent. The actual number of unemployed workers will be much higher.
2. The BEA will report real GDP to be less than 12,973 in billions of chained 2005 dollars.  A “double-dip recession” will be the official description, but rumors of a “second great depression” will be increasingly heard as the evidence mounts that a single large scale economic event is taking place.
3. The Federal budget deficit for 2010 will exceed the projected $1.17 trillion.
4. More than 200 banks will be seized by the FDIC. Their deposits will represent more than two percent of all U.S. bank deposits.  (Specific calculation: 305 banks and 5.2% of total deposits.)
5. Commercial bank loans and leases (TOTLL) will fall below $6.3 trillion.
6. All sectors credit market debt outstanding, which is published in the Fed’s quarterly Z1 Flow of Funds Accounts, will fall below $52 trillion.  This will mostly be the result of continued deleveraging by the financial sector, and to a lesser extent, the housing sector, which between them will decline by more than $1 trillion.
7. The national median existing-home price will not rise 4% from $172,600 to $179,500 as predicted by NAR’s lead economist Lawrence Yun, but will fall below 165k instead.  And if there is the sort of crash that is implied by the preparations for SuperTARP, existing home prices will collapse below $140k.

I also expect an increase in Sitemeter-recorded visits to the blog to increase from 1,942,640 in 2009, (161,887 per month) to 2,250,000, primarily as a result of an increased interest in economic matters. The 1.9 million visits, (3,115,071 page views), was up 19.6% from the visits 1,566,254 in 2008. I still find it astonishing that so many people continue to be interested in my various thoughts and opinions, but thank you for stopping by and please feel free to do so throughout the year.

Three book reviews

A new Summa Elvetica review by JS on Amazon:

In any other fantasy novel the question of whether elves have souls would be silly, but in Beale’s world it is profound question which has lasting repercussions. The question works because the medieval Roman Catholic Church is the one asking.  Most fantasy worlds have a facsimile of the Roman Catholic Church without the Roman and Catholic part. Outside of the addition of the RCC the fantasy world is very familiar to anyone who knows the genre. Tough, taciturn, stoic dwarfs and tall, beautiful, arrogant, magical elves live a world with orcs, goblins, lycanthropes, and demons. Beale succeeds in combing these elements into a lively and believable land.

Jason Clark reviews RGD on Amazon:

When considering the matter of how the world went into its economic meltdown people have many explanations, and many solutions.  In this informative and easily digested book, World Net Daily columnist, blogger and Austrian economist Vox Day applies his own expertise to analysing the problem and offering his solution.  Vox introduces us to the different economic schools that have weighed in on this issue, and details how their take on the matter generally fails to address the issue, and how their solutions will only make matters worse.

Bart Fuller reviews RGD on his blog, Liberty vs Leviathan and adds “It’s a most excellent book and joins Hazlitt and Bastiat on my short list of recommendations to friends wanting to learn about economics.”

This is a book for anyone and everyone wanting to make sense of the economic turmoil of the last two years.

One of my minor goals for 2010 will be to finish the sequel to Summa Elvetica. If I’m fortunate, it’s even possible that it might be published in 2010. But I’m not promising anything, as there are other projects which demand priority.

2010: the economic situation

As the new year kicks off, I’ve been trying to think of a way to explain the present economic situation in a simple and graphical manner that would not only illustrate the precarious nature of the US economy, but also explain my negative perspective on its prospects as well as the positive GDP reports and expectations on the part of mainstream economists. After wasting a fair amount of time poring over the usual BEA and BLS reports, I realized that because my analyses are primarily predicated upon debt, the only thing that made sense was to go back to the Fed’s quarterly Z1 report and look more closely at the sector data.  I have to confess that when the third quarter report came out a few weeks ago, I was surprised it did not show more contraction in the third quarter; total credit market debt only declined a further $113 billion from the revised Q1 2009 peak of $52.9 trillion.  The net contraction to date has only been 0.53%, which seemed weirdly small when the 8.7% contraction in commercial bank loans over the same period was taken into account.

But a look at the various credit sectors usefully clarifies this apparent dichotomy.  As the chart below shows, household debt reached its peak in the third quarter of 2008 and is down 1.75% since then.  The financial sector began reducing its outstanding debt a quarter later than the households, but is deleveraging much faster as its debt has fallen 5.93% from the Q408 peak.  Corporate debt has remained essentially flat since 2008, but the Federal government has, for the time being, been able to fill in the entire credit gap by increasing its outstanding debt by nearly one-third, 30.1%, in the four quarters since Q308!  State and local government debt has also increased, but by close to an order of magnitude less at 3.25%.  So, the reason we have not yet seen any significant effects of the debt-deleveraging in the household (-$242.8 billion) and financial (-$873.7 billion) sectors in the wider economy is because the Federal government has taken on an additional $1,743.4 billion of debt plus another $72.4 billion from the state and local governments to counter that contraction of credit.

So, the questions raised by this analysis are:  a) can the various levels of government continue to increase their outstanding debts faster than household, corporate, and financial debts decline, b) how long can the various levels of government continue to increase their debts, c) when will household, corporate, and financial debt stop contracting?  As of today, January 1st, 2010, the answers appear to be: a) No, the disparity of debt levels renders this impractical, if not impossible, especially since the early data indicates that household and financial debt is still declining. b) Probably not beyond the second quarter of 2010.  State and local tax revenues fell precipitously in 2009, many state and local governments are already on the verge of bankruptcy and the White House is already talking about attempting to reduce the 2010 deficit. c) given the growing number of mortgage and credit card payments reaching 60 and 90 days late, there is no sign of this happening in 2010.  In fact, much of the 2009 contraction that should have happened due to foreclosures and defaults has not yet been recorded on the books thanks to the extend-and-pretend policy presently in place.

The White House and the Federal Reserve are gambling that the contraction of household and financial sector debt will end before time runs out on their ability to increase Federal debt enough to compensate for that contraction.  But despite a panoply of credit-creation programs, changes to accounting laws, and regulatory easing, they are running out of time and there are still no signs of any further appetite for debt on the part of consumers or financial institutions.  The brief uptick in total bank loans from the middle of October to the middle of November has already given back its gains; TOTLL was still down 8.01% as of the most recent report on December 16th.  Therefore, I conclude that the White House already knows it lost its credit gamble, which is why it is now preparing the $4 trillion SuperTARP bill known as HR 4173.

Calculated Risk’s readers would appear to share my pessimism regarding the 2010 outlook, as 57% expect the economy to fall back into contraction.