The Economic Forecast: Uncertainty

The future, however, may not be as bleak as many of us fear. Nick Sargen, CIO and Senior Vice-President of Fort Washington Investment, confirmed that the financial crisis brought the economy to its lowest point in recent history. “Most people, including the National Bureau of Economic Research, the body that assesses if you’re in a recession or in a recovery, came out and said that they thought the economy touched bottom in the middle of last year,” he said in his interview with The Suit.

The specter of the Great Depression continues to loom in the haunting image of millions of Americans struggling to find work. Officials are hopeful of avoiding a depression but are not optimistic about unemployment. Dean Baker, co-director of the Center for Economic and Policy Research in Washington D.C., and former consultant to The World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD’s [Organization for Economic Co-operation and Development] Trade Union Advisory Council, said, “I think it takes some really misguided policies to get a depression, although I don’t rule that out,” Baker said.
“The most likely scenario,” he explained, “is just a long period of very weak growth and very high unemployment, and the baseline projections are exactly that.”

Baker predicts that, through 2011, the unemployment rate will cross the 10 percent mark, and it will take years before the unemployment number is restored to a normal level.

Even with these dire circumstances, some feel there are positive signs in the American economy. Andrew Busch, global strategist for Bank of Montreal’s Capital Markets, believes that, while progress could move faster, strides are being taken to greatly ease the recovery process.

“We’ve returned to growth, and my estimation is that we will see continuing, accelerating growth,” Busch stated. “We’re starting to see acceleration in job gains, and last month was  +159,000 for non-farm payrolls, so clearly there’s good things happening within the US economy.”

He believes that, while many people still remain jobless, the economy has passed its lowest point. “There are some people who are fearful of a double-dip, that even though the economy looks like it’s recovering, it could still weaken yet again. There’s a probability that could happen, but I’ve reduced [my prediction of that sequence] partly [because of] what the Federal Reserve is trying to do to make sure that we don’t have this so-called double dip.”

His prediction is based on quantitative easing, currently QE2, a strategy in which the Federal Reserve (the Fed) will buy $600 billion in long-term US Treasury securities by the end of 2011 in order to collectively increase the banks’ excess reserves and increase the nation’s money supply. This controversial tactic can lower interest rates and encourage spending by making it less expensive to borrow money, but it can also run long-term inflation risks (see accompanying story, “Quantitative Easing”).
Busch feels the program offers little reward with great risks. “I don’t think it will greatly aid in lowering the unemployment rate; I don’t think it will greatly aid in creating economic growth; and I think there is a risk that it will create inflation, not today, not necessarily tomorrow, but in about a year to 18 months from now,” he said.
“There is plenty of money in the system right now. Banks hold already a trillion dollars worth of free reserves at the Federal Reserve. That’s money they have that they ‘re not lending.”

On the other hand, Baker believes that there is no risk of inflation, which occurs, according to Baker, “when too much money is chasing too few goods and services.” He doesn’t see that happening any time soon, asserting that the economy can handle the excess cash.
Justin Hoogendoorn, Managing Director for the Strategic Analytics Group for the Bank of Montreal, sees another motive behind the Fed’s actions – a political tool used to ease consumers’ worries (by strengthening our financial institutions, including the stock market). “It’s really more of a symbolic thing; they want to show that they’re doing something else to support the market, try and keep confidence in the US market high,” he said.
Another goal is to get credit going again. It is still hoped that quantitative easing will have some effect there. The new financial regulations, in Dodd-Frank [Wall Street Reform and Consumer Protection Act] have created some confusion in terms of new lending regulations. Obama has continued Clinton’s efforts to facilitate small business loans, but some banks claim to be holding back on lending because of uncertainty over the new rules.

That issue points to the larger question regarding the government’s role. “There is a much bigger government sector today,” said Sargen, “on top of budget deficits that are predicted to be at record levels.
“The real issue right now, when we are resource constrained,” he added, “is [to] create policies that make companies feel more confident about the future. Bigger companies are making record profits,” he continued, “but with an unstable economy, a future of uncertainty, and new health care legislation,companies are holding double what they usually hold in cash reserves, and refuse to hire.”

Justin Hoogendoorn agrees that regulation is problematic. “Regulation is never a good incentive to increase your hiring,” he said, “and I think that putting a new health care structure in place makes it very difficult because, when companies have increasing costs for health care, I think there’s always going to be less incentive to hire.”
Baker feels that the Fed needs to be more aggressive in pursuing inflation-raising policies, as quantitative easing is intended to do. If companies expect inflation rates to rise, they will have incentive to manufacture and produce in the current economy when costs are cheaper. “If you can convince the economic actors that you’re serious, it will affect behavior,” Baker asserted. “If everyone thinks that inflation is going to be 4 percent a year over the next three, four, five years [and you can] sell for, let’s say, 10 percent more three years out, it’ll give you much more of an incentive to invest today.”

Americans must adjust to what seems to be a long struggle to climb out of this mess. The future remains unclear. There is no sure sign of real growth. But the markets and the banking institutions, as well as, for the time being, the auto industry, have been stabilized. Yet, solutions to unemployment are not on the table. In fact, recently, the extension of unemployment benefits was held hostage, along with middle-class tax cuts, for getting across-the-board Bush tax-cut extensions for even the top two to three percent of the population, who will probably not use that money to create jobs.

Hopefully, there will be solutions in the future which will address our current structural weaknesses in the production of goods and services which the rest of the world needs, and which we are uniquely capable at providing, tapping into the potential of American entrepreneurship, ala Silicon Valley. 

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