The 2010 Economy and the Recovery<br />What are the indicators telling us?<br />Will this recovery look like the previous ones?<br />Banks and commercial lending.<br />Democracy in Deficit: Does it really matter?<br />Patterns across the nation<br /> Employment, GDP Growth, Voting with their feet.<br />Bottom line. <br />
How Bad is the Commercial Real Estate Problem?<br />The commercial real estate (CRE) sector has contributed to an upsurge of bank failures, following sharp contraction in the recession. The value of commercial and office construction totalled almost $140 billion in 2008. By September 2009, the value was $90 billion. On June 30, 2009, outstanding CRE debt was $3.5 trillion. About half was held by banks and thrifts. The other half by investors.<br />In 2009, nonperforming CRE loans as a share of bank capital grew from 4.47% in September 2008, to 7.4% in September 2009.<br />Within banking, community banks have 30.7% of their loans in CRE, compared to 12.1% for the larger banks (those with more than $100 billion in assets).<br />For all community banks nationwide, nonperforming CRE loans make up 6.5% of total risk-based capital. The risk-based capital of community banks receiving TARP funds was 11.7%. Banks, on average, can sustain the CRE losses, but a large number of smaller banks cannot.<br />Some $500 billion in CRE loans will be maturing over the next few years. This is the moment of truth. Can the borrowers refinance?<br />Source: The Regional Economist. St. Louis Federal Reserve Bank, January 2010. 10-11.<br />
Viral Archarya. Systemic risk and deposit insurance. September 4, 2009. http://www.voxeu.org/index.php?q=node/3941<br />
Democracy in Deficit<br />In 1977, Nobel Laureate James Buchanan and his colleague Richard Wagner threw out Keynesian assumptions and wrote about fiscal policy on a clean slate. Why, they asked, are democracies systematically in deficit? The answer: Political incentives.<br />Let’s consider some data.<br />
2010 Outlook<br />GDP growth will range from 2.2% to 2.5% for both 2010 and 2011.<br />The unemployment rate will average 9.5% for 2010 and 8.4% for 2011.<br />Inflation will remain low, perhaps at 1% in 2010.<br />Interest rates will remain tame, with perhaps a 100 basis point increase at the long end of the yield curve by the end of the year.<br /> <br /> There are four hazards or ghosts from the past that may disturb the outlook.<br /> <br />Fear-driven increases in personal savings, which means rebuilding consumer net worth but further reductions in retail sales.<br />Rising energy prices.<br />A potential for massive inflation or credit market manipulation by the Fed to avoid it.<br />Government entanglement in the economy that regulates and otherwise limits economic freedom.<br />
Next Three Months?<br />Yes, it is a caterpillar economy, but a solid growth base is showing up in manufacturing. Housing markets are firming, and retail sales are picking up a wee bit. GDP growth over the next quarter should exceed 2%. But unemployment will rise above 10.5% We should keep our money in the market…, that is , if we have any left. The Dow will rise above 10,900.<br /> 14<br />2. Caterpillar be damned. A double-dip is showing up. Stimulus comes and goes, but there is nothing to offset bankruptcies and defaults in the commercial property market. First and second quarter GDP growth will likely trend downward to less than 2%, and the Dow, still looking for profits, will be locked at about 10,500. Unemployment? Get ready to see 11%.<br /> 15<br />3. Everyone knew that China was keeping us afloat, but few wanted to admit it. Now that our great benefactor has decided to put a lid on GDP growth, there will be less Chinese demand for stuff we produce (they love our agricultural products) and less surplus there that needs to be invested in good old U.S. bonds. You guessed it. Interest rates will rise. The U.S. economy will get a case of the slows, and our GDP growth will begin to look awfully pale. Now, this won’t happen overnight, but the ugly edge will start showing up in March or April. Look for GDP growth here to get clamped at around 1.5%. Unemployment to head toward 12%, and the Dow to start looking for 9,800.<br /> 4<br />
Next Three Months?<br />Whew!! I feel like we getting out of the woods. But that’s not saying we are on the Yellow Brick Road, at least not yet. By June unemployment should have peaked, perhaps at 10.8 percent and then be in the 9.5% range Retail Sales will be nudging up. Housing will be firmer. But the price of oil will be nudging up too. Inflation, oil included, will be troublesome. 1Q2010 GDP growth will surprise the pessimists. It will be above 2.5%. Dow –Jones? I am still counting on 10,900 by June.<br />2. I am not ready to join the ranks of raving optimists yet. I’m not even sure there is a Yellow Brick Road any more. As they say, the light at the end of the tunnel has been turned off to save energy. That said, I think we will see the expected pale 2.0-2.5% GDP growth in 1Q2010. The unemployment rate will be hanging at 10.5 percent. Bank lending will still be in the doldrums. In short, the economy will still be in the pits, just going nowhere.<br />
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