Saturday, December 19, 2009

2010 Economic Outlook

It's time to post some economic outlooks from sources not affiliated with mainstream investment companies. The mainstream can be readily identified by their marquis brand names and reputation for being on the speed dials of the Bernanke and Geitner phones. Is it possible that there is someone employed by a high profile employer, who would acknowledge the conflict of interest that employment places them in so that objective analysis is plausible? Yes it is possible, but I am not interested.

Today, I am reading the work of Paul Kasriel, Director of Economic Research at Northern Trust Co. He has posted his economic outlook on Safe Haven and a link to it is here. I find his analysis to be a little more optimistic than many of the opinions I am reading. His forecast, in my opinion, assumes there are not going to be economic shocks during 2010 and that the modest improvements we have noticed during the past few months will be sustained, leading to no improvement in unemployment. So it is not rosy by any means. Here is a sample from his outlook to give you a flavor of his GDP outlook and inflation forecast.

Another factor accounting for our upward revision to Q4:2009 real GDP growth is net exports. Real exports grew at an annualized pace of 17% in the third quarter and the October trade data suggest that real exports in the fourth quarter could grow even faster. This is largely due to the economic recoveries underway in the rest of the world. Almost 43% of the October increase in nominal U.S. exports of goods was purchased by Pacific Rim and South/Central American countries. We believe that developing economies will become even larger purchasers of U.S. exports in the coming years.

Housing completions are up and spending on home improvements went through the roof in October. This is what prompted us to raise our forecast for residential investment expenditures in the fourth quarter of this year.

All else the same, the large upward revision to our Q4:2009 real GDP forecast implies an upward revision to our average annual real GDP growth forecast for 2010 due to arithmetic. This, plus a little less assumed inventory liquidation in Q1:2010 has resulted in our forecast for annual average real GDP growth in 2010 increasing to 2.5% from last month's forecast of 2.2%. Despite the upward revision, this is tepid growth for a recovery, especially after such a deep recession.

Why do we not see more robust growth for 2010? Because the private financial system appears to remain incapable of creating much, if any, net new credit for the private sector.

On inflation:
Despite this year's depreciation of the dollar in increase in the price of gold, a market-based proxy for investor inflation expectations has not signaled much concern (see Chart 5). Yes, the market-based expectation of average CPI inflation over the next ten years has risen from near zero late last year to about 2-1/4% currently. But late last year, the global economy was on the precipice of another Great Depression, which, if we had fallen over, would have ushered in deflation. But we did not fall over the precipice and we now are experiencing an economic recovery. So, deflation is off the table. But inflation expectations remain below where they were pre-Lehman. In addition to this market-based measure, we have two other gauges of inflation expectations. When a national men's clothing store chain stops offering three suits for the price of none and when a national upscale steakhouse chain abandons its "value meal" menu, then we will know that inflation is about to move much higher!