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THE BLEAK OUTLOOK JUST GOT BLEAKER.
According to the September survey of 50 forecasters released Friday by Blue Chip Economic Indicators, the consensus outlook for economic growth fell for the third consecutive month.
Real GDP growth in the current, July-September quarter is projected to run at an annual rate of 1.8%, little better than the disappointing 1.6% in the previous quarter. With a small pickup expected, to just 2.3% in the fourth quarter, the recent unemployment reading of 9.6% should persist through the end of this year.
This outlook means that the recovery from the Great Recession will run the longest in the post-World War II period by a wide margin.
A recovery from recession ends, and the expansion resumes, when real gross domestic product at least matches the peak before the recession began. The last two recessions comparable to this one occurred in 1974-75 and 1981-2, and the recoveries took, respectively, three quarters and two quarters before the expansion resumed.
This one, by contrast, will take more than twice as long. The consensus is forecasting that the peak in real GDP of fourth quarter 2007 won't be exceeded until first quarter 2011. If the recovery began in the third quarter of 2009, that means it will have taken seven quarters before the expansion resumes.
INFLATION-ADJUSTED CONSUMPTION, which is after all the main point of economic growth, is projected to exceed its fourth-quarter '07 peak a bit earlier—by the fourth quarter of this year. But over the three years in between, the domestic population rose by more than six million, or by about 2%, so that still means there will be less consumption on a per capita basis.
The after-tax income of consumers is already at an all-time peak, even in inflation-adjusted terms. But the mix is hardly reassuring, with a rising share coming from government-transfer payments and a falling share from work-related income.
Consumer income has been rising faster than consumer spending due to the increase in personal savings. In 2007, consumer outlays ran 97.9% of after-tax income, a share that fell to 94.1% by 2009; spending has run 94.2% through the first half of 2010.
The consensus projects that consumption will grow a bit faster than after-tax income through this year and the next. But personal savings rates of 2% or less aren't expected to make a comeback.
The expansion that is projected to resume next year will be no great shakes, either. But real GDP growth will slowly accelerate, from 2.5% in the first quarter to 3.2% by fourth quarter 2011—"above-trend" growth, in which the economy expands fast enough for the increase in jobs to exceed the increase in the labor force. Result: a gradual decline in the unemployment rate, to 9.0% by the fourth quarter, from the recent 9.6%.
Even the 10 most optimistic forecasters of the 50 surveyed expect the rate of joblessness to be at 8.4% by fourth quarter 2011, which is still quite high. The 10 most pessimistic believe joblessness will still be running 9.6% by the end of next year. Inflation is expected to stay tame.
BLUE CHIP EXECUTIVE EDITOR Randell Moore (the founder was the late Robert Eggert) also asked the 50 forecasters a few special questions.
Asked to give the odds of at least one quarter of contraction in real GDP over the coming year, the consensus put it at a bit less than one in four. Even the 10 most pessimistic weren't betting heavily on contraction, putting the odds at a bit better than one in three. The 10 most optimistic put the odds at a bit better than one in 10.
On the potential boost to GDP growth if the Federal Reserve purchases another $1 trillion of Treasury securities over the coming year, more than three-quarters of respondents thought that such "quantitative easing" would have no effect or a small one. Only 4% of respondents thought it would have a significant effect.
On where the unemployment rate is likely to be when the Federal Open Market Committee finally decides to raise its target on the federal-funds rate, the consensus estimate was 8.7%. Since the consensus forecast is that joblessness will still be higher than that by the end of next year, the consensus as a group clearly does not believe a rate hike is imminent.
Economist John Taylor, not part of the Blue Chip consensus, would like the FOMC to raise rates now, although quite modestly. Taylor would boost the current federal funds rate target—0% to 0.25%—to just 0.75%. That figure is based on the Taylor rule formula, which Taylor developed using the rate of inflation and the "GDP gap"—the difference between potential output and actual output.
Since the housing bubble was partly brought on when the Fed abandoned the Taylor rule, a rate rise to 0.75% would be reassuring, at least symbolically.
E-mail: gepstein@barrons.com
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