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As 2011 kicks off, the U.S. economy looks the healthiest it has in years, but that doesn’t mean the recovery won’t face strong headwinds.
Five risks in particular could crop up in the first half. Individually, none is likely to derail growth, but each could raise anxiety in equity, credit and currency markets.
1) The continuing resolution fails. The U.S. government is on track to run out of money by early March. Congress must raise the debt ceiling in order for Treasury to keep borrowing. Fiscal hawks, particularly newly elected Tea Party members, are threatening to hold hostage the government’s ability to fund itself unless spending cuts are enacted quickly. While no one refutes the need for Washington to pare down its budget, closing down the federal government could upset the Treasury markets. The resulting spike in rates would negate the Federal Reserve’s goal of keeping long-rate low to help growth and promote hiring.
2) Continued Fed bashing. Speaking of the Fed and Congress, another concern is how serious are threats from Capitol Hill to rein in the Fed’s independence. Again, the risk to the outlook is the reaction by financial markets. The first glimpse of tension could occur Friday when Fed chairman Ben Bernanke is scheduled to testify to the Senate Budget Committee on the 2011 outlook.
3) Businesses don’t hire. One key support to a brighter outlook is the idea that businesses will increase hiring at a rate fast enough to bring down the jobless rate in 2011. That pace is generally considered to be somewhere north of 150,000 per month. What if companies do not follow the game plan, possibly because demand is not strong enough to suit them? If job growth stays at the 100,000 per month seen in 2010, look for consumer confidence and spending to fall back.
4) Home prices fall significantly. Once the government tax credit ended in mid-2010, home prices resumed their decline. If that drop accelerates–perhaps because job growth doesn’t pick up or long-term rates pop up–expect a double whammy on growth. First, falling home values will make households feel less wealthy, another potential drag on consumer spending. Second, declining home values will only worsen the homebuilding and mortgage situations. 5) Gasoline jumps to $5 a gallon. Gas prices are already at about $3 per gallon and winter is usually the weakest time for gas prices. The recent surge in crude oil has raised the possibility that gasoline could hit $4 by the peak summer driving season. The big danger is that saber-rattling in the Middle East or an unexpected refinery shutdown could push prices closer to a sawbuck a gallon. Given that Americans use about 378 million gallons of gas per day, each dollar rise in gas prices, if sustained, means $2.6 billion a week must be diverted toward the gas pump and away from other spending.
Clearly, none of the obstacles is a sure bet, but the risks do play into one another. Rising energy costs, for instance, could leave businesses with less cash for hiring. And each bears watching. They represent potential dark clouds that could dim a relatively sunny outlook for the first half of 2011.
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The overriding issue is having politicians who thank long term means later today trying to run the economic direction of the country. Some of them can’t walk and chew gum.
http:/www./opusonemedia.blogspot.com/2011/01/putting-time-bomb-in-hands-of-village.html
I am not clear on why number one would be true. A reduced supply of bonds would result in higher prices, not lower. While we lose some price discovery with lower volume auctions, sales would still take place to replace maturing debt.
so you don’t want to reign in the Fed’s “independence”? do you really think they’re independent? the Fed not only needs to be bashed, it needs to be destroyed - before they destroy us, if it isn’t too late.
so you really want home values to stay propped up, so that people feel wealthy? you really want to double down on the delusional mentality that got us into this mess? do you really think that corrupt coercive forces should control the supposed value of homes? as it is, these coercive forces have both an affordable housing policy and a keep-home-values-artificially-high policy simultaneously, with typical successfulness.
you’re arguing for a puppetmaster command-and-control kleptocratic self-deceived self-destroying phony-baloney debt-ocracy, led by a bunch of crooks and clowns who ushered us right into this mess, didn’t recognize it until it was far too late, if ever, and are perpetuating the same policies but to a greater degree, while telling us that it is necessary and for our own good, etc.
wake up.
$5/gallon for gasoline? We asked for it. almost 40 years after the oil embargo Americans still choose large vehicles and large engines to travel across town. We asked for it, we got it. Now, oil will hit $100 again and gas over $4. Which of you is really surprised?
Old news, the undertaker called this repeatedly on commodities for a couple of years now.
Gold futures rose to a record closing price and silver topped $31 an ounce, extending a rally to the highest since 1980, as Europe's sovereign-debt woes spurred demand for precious metals as a haven.
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