The Economic Forecast

With the caveat that should come with all forecasts, that in the words of my father-in-law, the Colt 45, they're all just guessing. This is what the Colt, who drove a tank in Italy and France during The War and who is now in his late 80's, would say regarding the weathermen, or pretty much anyone who purported to be an expert on something or other. I have to say that over the years I have come around to his way of thinking, and all the advanced degrees from Ivy League schools and publications in journals no one reads, except those with advanced degrees from Ivy League schools, and my personal favorite, membership in a prominent think tank, can change the fact that they, we, are only guessing when we make predictions, whether they be about the weather, football games, elections, or the economy. With that said, here's the forecast from the Ordinary Average Guy Institution, a world renowned think tank representing the views of regular people everywhere.

First the obvious, or at least by now it should be obvious that we are in tough economic times. Call it what you will, recession seems to be the term of choice, downturn for those that want to be a bit more on the optimistic side, and depression is a term of last resort because it's well, so depressing. Many people, including your humble correspondent, saw this coming over a year ago, based on the fact that the housing market was starting to tank, credit for consumers was starting to tighten, the stock market was an obvious bubble about to burst as it was approaching 14K, and wages weren't likely to increase anytime soon. In short, most middle class Americans, which is a group that includes, at least psychologically if not mathematically, most people that have household incomes in between 50K and 500K, most of us were quite simply running out of money to spend.

No longer able to spend based on the paper wealth provided by our once soaring stock portfolios, or able to borrow against the ever increasing values of our homes, or able to choose from among dozens of credit card offers being delivered to our kitchen counters every week, we were bound to butt up against that place where all the stuff we didn't really need to be buying anyways meets up with i think it's just as well because we are broke and in debt. This is the intersection where recessions tend to begin, considering that American consumer spending accounts for 70% of our economy and as we have a negative savings rate as a nation.

But this is all old news now, and while I don't expect to ever be paid off on my bet, made last fall when the market was cruising, that it would drop to 12K by Super Bowl Sunday, a prediction that now looks very conservative as the market is now hovering in between 8-9K, I've been waiting for the majority of Americans to come to the realization that this is not just a minor bump in the road to riches. It seems that most have seen the light, which is good because in order to deal with a situation you must first acknowledge that it exists. So now comes the hard part, but before I look at what likely needs to be done I want to focus today on what the future may hold.

I see two plausible scenarios, the first of which I would put at about 50-60% chance of occurring. This scenario is a modest to severe recession, lasting throughout 2009 and likely well into 2010 before the corner is turned. In this scenario, we see continued trends such as unemployment, with the rate of joblessness probably reaching up around 10% nationwide, the Dow and other indicators dropping perhaps another 20-25% from where they now stand, which would put the Dow around 6K at the bottom, and very small GDP growth, if any growth at all. If the plans of the Fed now come to fruition, interest rates should stay low as inflation seems likely to remain benign, and this will give some help to the housing market, to business investment if the banks ever start lending again, and will give relief to consumers for basics such as gas and groceries.

We come out of this recession within the next couple years hopefully having learned some lessons about excess and the nature of markets and bubbles that might serve us well into the future, and we come out leaner and meaner and ready for the next wave of good times, just in time for Obama's reelection campaign, although probably not quickly enough to save the Democrats from keeping control of both houses of Congress in 2010, which may not be such a bad thing.

In the second scenario, which I would give a 30-40% chance of occurring, you take the above predictions and worsen them by a factor of about 50%, this would be a much more severe recession, even bordering on depression. Unemployment could hit 12-15%, GDP growth goes negative, the Dow drops under 5K, and even low interest rates aren't enough to save the housing market from going further in the tank and capital spending around the world from drying up severely.

I honestly don't foresee another Great Depression, although that is an obvious comparison and seems to be mentioned quite often, probably more for the shock value and the recognition factor than for anything else. We have a different economic system and many more safeguards in place now than we did 80 years ago. Also, in a true global system like the one we are in, nobody escapes the pain on the down side, but the flip side of that is that once recovery begins somewhere around the globe, those effects will also catch on and find their way to prop up ailing economies. This scenario would see us in tough times probably for 2-3 years before starting to rebound, perhaps sometime in late 2011 or early 2012, and would probably bring about many more fundamental changes in our economic system, both domestically and internationally.

The other two possible but unlikely scenarios, which I would give at less than a 10% chance of occurring, would be for a complete collapse on the one hand, something that would make the 1930's look good by comparison. This is the scenario that the survivalists are envisioning, where hordes of hungry people will roam the streets in search of food in some sort of post-apocalyptic world. Personally I think these people spend too much time on conspiracy theory web sites and watch too many Road Warrior movies, but you never know. The other plausible but unlikely scenario would see this recession turning out to be not such a big deal, and something that we emerge from by summer time and have forgotten about by this time next year. Again, this could happen, but I wouldn't bet the farm on it.

So there is the forecast, from the perspective of one who lacks the MBA or advanced degree in economic theory, but who has an honorary doctorate in life observations and an understanding of what the average ordinary man and woman goes through because I am one of them, as I imagine are most people reading this column. Next time I get around to the topic, I will offer my opinion on what, if anything can be done to alleviate the recession, and whether or not the stimulus package being offered by Obama is likely to help or hurt.