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Rex Nutting
Dec. 29, 2010, 12:00 a.m. EST
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Markets aren't the answer to every problem
First Take "º
Retailers cash in, but recovery still hazy
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) "” Mainstream economic forecasters totally misjudged the collapse of the credit bubble in 2007 and the ensuing Great Recession, but when it came time to predict the recovery, they got it right.
Here's what I wrote a year ago in a preview of the 2010 economy: "The U.S. economy is limping "” not sprinting "” out of the Great Recession of 2008 and 2009.
"While the economy is likely to grow at a steady but unspectacular 3% pace in 2010, the prospects for significant job growth are dim and the unemployment rate could still be in the 10% neighborhood at this time next year, economists say." Read my 2010 outlook story.
That's exactly what happened.
Weak housing data and talk of a "double-dip" weigh on stocks ahead of a key Treasury auction. Deborah Lynn Blumberg, Kristina Peterson and George Stahl report.
Most forecasters and informed observers expected the recovery to be weaker than usual, for all the reasons we've been reading and writing about. Typically after a severe downturn, the economy will boom for a while, growing at 5% to 8% before settling down to cruising speed.
But few expected that to happen in 2010. Household finances were seriously out of kilter. Debts needed to be paid off or written down. With job growth barely keeping pace with the population, wages should be flat, forecasters said. Personal consumption was expected to increase at a modest pace. Housing was a basket case.
At the same time, the massive amount of slack in the economy (idle workers, machines, factories, offices and stores) meant that inflation could not gain any traction.
Despite the dire warnings of a few who predicted a spike in general prices because of the actions by the Federal Reserve and the government to flood the economy with money, inflation actually came in lower than expected. The consumer-price index has risen just 1.1% in the past 12 months, while core prices have risen 0.8%.
Forecasters got the growth part of the economy right, but they missed on their inflation call. Because they didn't expect disinflation to be a major theme of the year, they missed the call on interest rates and the Fed as well. A year ago, the consensus of forecasters thought the Fed would have raised its short-term target rate to about 1% by now; it's still stuck near zero.
That was then. What do the forecasters expect for 2011?
Fortunately or unfortunately, they are forecasting more of the same: a slow, steady improvement in the economy, leading to more jobs, more investment and more spending. But the improvements will be modest; the economy still won't feel like it's booming.
According to the latest consensus forecast published by Blue Chip Economic Indicators, the economy is expected to grow 2.6% in 2011. The unemployment rate is expected to average 9.4% in 2011, and drop to 9.2% by the end of the year, marginally better than November's 9.8%. The CPI should rise 1.5%.
That forecast doesn't seem like much of an improvement over 2010, and it isn't. Probably the best news on the outlook is that a few of the more bearish forecasters on the Street have turned slightly more upbeat lately, including Jan Hatzius of Goldman Sachs and Ethan Harris of Merrill Lynch. The recovery is becoming self-sustaining, and the odds of a double-dip recession have faded, they say.
"The U.S. growth outlook has brightened significantly," wrote Ed McKelvey, an economist with Goldman Sachs. "We think that the pace of private-sector deleveraging is slowing in an environment of somewhat lower debt/income ratios, improving credit quality and moderating lending standards."
Even with this brighter outlook, the unemployment rate will remain very high for quite a while, according to McKelvey. The jobless rate will be above 9% a year from now and will fall to just 8.5% at the end of 2012, he predicted.
A somewhat more optimistic view comes from Stephen Stanley, chief economist for Pierpont Securities, who argues that 2010 was a mediocre year mostly because businesses faced too much uncertainty about taxes, regulations and final sales.
"I look for hiring to ramp up dramatically, with monthly payroll gains averaging well over 200,000 per month next year," Stanley wrote in a recent note to clients. He sees the jobless rate falling to 8.5% by the end of 2011.
The consensus forecast always misses something that seems obvious in retrospect. What are the main downside risks for the economy in 2010?
Lots of things could go wrong, of course. I'll just mention two things to worry about. Feel free to add your own favorites in the comments.
Housing remains the big unknown. Home prices probably have further to fall, which means more foreclosures and less wealth and mobility for middle-class families. What impact those additional foreclosures will have on the banking system isn't certain. Some regional banks are bound to fail.
A worsening of the sovereign-debt crisis in Europe could also roil financial markets and hurt the American economy by cutting into exports. Some U.S. analysts also see parallels with Greece in the debt burdens of state and local governments, which they say could lead to massive defaults on municipal bonds and further layoffs of government employees. But if the economy continues to grow, a muni explosion is unlikely.
Economic forecasters lost a lot of credibility when they failed to predict the Great Recession. They got a lot more right in 2010 than they got wrong. Will 2011 be as good to them?
Rex Nutting is Washington bureau chief of MarketWatch.
Merchants ring up a banner holiday-shopping season, helped in part by discounts that weren't too deep and momentum that started early. But is this really a sign of recovery?
12:47 p.m. Dec. 28, 2010
"Hong Kong stocks open higher, with banks and energy rising; Hang Seng Index up 0.3% http://on.mktw.net/dPtai7" 9:05 p.m. EST, Dec. 28, 2010 from MarketWatch
"Japanese shares open lower as yen rises vs. rivals; Nikkei Average down 0.1% http://on.mktw.net/gWyhIA" 7:07 p.m. EST, Dec. 28, 2010 from MarketWatch
"U.S. stock indexes end mixed, but Dow industrials manage highest close since August 2008 http://on.mktw.net/eJ24Ta" 4:03 p.m. EST, Dec. 28, 2010 from MarketWatch
"Allstate sues Bank of America over $700 million investment http://on.mktw.net/dWI5D1" 1:42 p.m. EST, Dec. 28, 2010 from MarketWatch
"U.S. consumer-confidence gauge dips in December http://on.mktw.net/gfKSE5" 10:04 a.m. EST, Dec. 28, 2010 from MarketWatch
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