Where is the Economy Going?

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Most people instinctively feel the economy is not doing well. They see the near 10% unemployment rate, lackluster business results, mixed stock market returns and other indicators. What do the coming months hold for the economy?

Let's take a look at the recent past:

Consumer confidence / demand / Total demand is low. The average American balance sheet is much worse now than it was just 3 years ago. Their investment portfolio is perhaps 20% lower than it was. Their home may be worth 20% less on average than it was 4 years ago. They may have a job that is insecure with certain salary growth, or they may be unemployed. Their net worth is lower, and their debt is a higher proportion of their assets, (or they may be a net debtor). Of course, they are trying to rebuild their balance sheets, primarily by being very cautious spenders.

For businesses, since the beginning of the recession in Q4 of 2008, which began with a huge shock to the system, business performance has tread water for the most part. GDP has barely returned to its' 2007 level *. Most businesses are performing modestly at best, with very modest growth levels since 2008 on average. A recent survey by the NFIB ** showed most of their indicators at neutral or negative readings. Most other business forecasting indicators are not much better. Most business balance sheets have deteriorated along with their earnings since 2008.

Credit / Capital markets have not returned to normal. Some businesses are having trouble raising capital. Small businesses and especially new businesses are reporting a much harder time getting funds. But even given this, many businesses report that they do not want to borrow funds, as they do not have adequate demand / revenue to justify and pay them back.

Of course the Fed has flooded the banking system with funds through low / zero interest rate borrowing to the banks. And the federal government has spent billions through the stimulus package. Of course, besides this being good for the banks themselves, this has really only trickled down to large businesses, if any. The stimulus funds have been primarily used to keep state and local governments going, which may be better than the alternative, but has done close to nothing to advance investment in business.

Given this, what do the coming months hold?

I predict very low positive growth over the coming months, with GDP in the 1 or 2% range through the rest of 2010. This will slowly build to a more robust recovery in 2011. The stock market will grow by a few percent the rest of This year. Unemployment will slowly edge down, ending the year close to 9.0%, not returning to more normal levels (6-7%) until the end of 2011 or 2012. Of course, the federal budget deficit is increasing at an alarming pace. Given current deflationary pressures, I do not believe it's a huge problem now, but government inflows / outflows will need to be brought closer in line as the country comes out of recession or that will jeopardize any recovery in the future.

* In all of 2009, nominal GDP was essentially zero, although it rose to 5.7% in Q4. It decelerated in Q1 2010 to 2.7%, and the forecast for the reminder of 2010 is lower. Nominal US GDP declined 1.9% in 2008, the largest decline since 1946. It had previously risen 2.1% in 2007, which was already anemic.

** National Federation of Independent Business – August 1, 2010

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Source by Sean P Greene