Lindsey Piegza's Economic Outlook Dec 2010

1. 2011 Economic Outlook: Recovery or relapse? Lindsey PiegzaEconomist December 2010

2. The Economy is Growing,but not Fast Enough to Create Jobs

3. Rapid productivity growthmandates stronger GDP growth

4. The employment trend has collapsed

5. Job growth likely to reach 200-250k next year

6. Retail sales are encouraging…

7. …but consumption is not accelerating

8. Household borrowing grew for 70 yrs before 2008

9. It will be years before debt is balanced with income

10. Housing is bouncing on the bottom

11. Flat housing starts means little GDP contribution from residential investment

12. Business investment is cooling, too

13. Investment in equipment and softwarewas driven by pent-up demand

14. Inventories and imports will play a smaller role next year

15. Retail inventory to sales ratio

16. Inventories are topping out

17. Inventory contribution to GDP growth

19. Worries about health care cost increases.

22. How bad is it?

23. Transfer payments as % of income

24. Relative job growth, 2000-2010Housing boom masked deep structural problems

25. Relative job growth, 2000-2010Stimulus to save gov’t jobs ignores erosion of tax base *excluding decennial census workers

26. No room for fiscal stimulus

27. State budget shortfalls are huge

28. Private credit is not growing *excludes financial debt to avoid double counting

29. S&P 500 (real $, log scale) Deregulation Leverage cheap Opportunities abound Leverage ineffective, thenLeverage expensive Regulation returns Returns limited Leverage ineffective, thenLeverage shrinking Regulation returns Returns limited

30. There are still positives

31. Manufacturing job growth fastest in over a decade

32. …and the workweek is rising

33. Equipment orders are recovering

34. The savings rate is high

35. Most states doing better-than-average

36. Interest rate and markets outlook

37. The Fed will wait longer to hike than in 2004

38. Cyclical components are deeply deflationary

39. Deflation Deflation is sustained falling prices. Sustained deflation doesn’t happen without a loss of purchasing power. Hence, true deflation is sustained falling product prices and falling asset prices and falling incomes. Deflation turns credit on its head. Rather than growing into debt, as with inflation, debts grow in real terms over time.

40. It still adds up to QE, which drives L-T yields

41. Inflation outlook The Fed can (and has) ignite faster food and energy inflation, but core inflation is grinding lower. Consumers cannot accelerate gas and food purchases. The effect is the equivalent of a tax hike. Not productive. Growth outlook The slowdown came earlier than it should have. Inventory building is not necessary without sales growth, and sales growth stopped in April. Hopefully the pause is temporary, but we have not had a rebound without a mortgage refi boom since 1983 and QE may be counterproductive. Without a refi boom, time is needed to rebuild household balance sheets. Private sector jobs are key. Time could be the only path to recovery. As you see data ebb and flow, ask yourself if it is consistent with 4%+ GDP. If not, the unemployment rate is likely to stay high.

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