The 12-month-old U.S. economic recovery is in “good shape,” a new survey of economists advises. The National Association for Business Economists reports that 46 panelists of macroeconomic forecasters “marked up their predictions for economic growth in 2010 and expect performance to exceed its long-term trend this year and next,” according to a press release published by NABE today. The upbeat view comes at a time when the deflationary risks appear to be rising, if only slightly, as we discussed last week (here and here). The great struggle between growth vs. contraction in the post-recession period has begun. Expansion still has the upper hand, but the minions of decline aren’t going to fade away quietly.
Reading NABE’s full report certainly stiffens one’s resolve for thinking that the future is still modestly bright. Consider a few highlights from the survey, which we quote verbatim:
* The NABE forecast panel has boosted its expectations for growth in 2010 to 3.2 percent for real GDP from 3.1% in its February forecast.
* Many of the forecasters believe that the traditional cyclical forces of pent-up demand and inventory building are becoming more important. Although financial headwinds will temper the pace of growth, concerns about credit conditions have eased somewhat compared to February’s survey. Inflationary pressures are expected to gradually build, but a “stagflation” scenario—a combination of slow growth and high inflation—is considered highly unlikely.
* The biggest boost to the outlook comes from households, as forecasters have marked up their outlook for spending. Real consumer spending is still expected to lag behind the overall economy but should see sizable growth. Part of this mark-up reflects reduced expectations of thrift. The saving rate for 2010 is currently expected to average a modest 3.4 percent—down from the 4.6 percent rate predicted just three months ago.
* Job growth is now on a steady footing. Except for a third-quarter slowdown related to a reversal of Census related hiring, job gains are expected to remain robust throughout the forecast horizon, as output gains remain steady but productivity gains progressively slow. The jobless rate is forecast to steadily decline to 9.4 percent by yearend 2010 and 8.5 percent by year-end 2011, though it remains high by historical standards and is ranked by panelists as their second greatest “concern.” Additionally, NABE panelists increased their estimate of the unemployment rate consistent with full employment to 5.5 percent from 5.0 percent previously.
The survey also notes that business investment will “be an engine of growth.” How so? NABE explains that “the massive inventory liquidation of 2008-2009 is over, with restocking slated for the next two years. Second, business spending on equipment and software will be strong, likely buoyed by a combination of higher operating rates and rising corporate profits.” Also, the survey panelists predict that corporate profits will rise by a robust 20% this year, followed by a 7% gain in 2011. And with low interest rates extending out as far as the forecasting eye can tolerate, it all looks like smooth and easy sailing for the second half of 2010.
Count us among those who think the economy will continue to improve, but we draw the line in thinking that it’s all a bed of roses from here on out. If we could somehow fast forward to 12 months hence, our expectation for looking back on the year would be one where the majority of economic indicators post positive change. But getting from here to there is likely to be rocky, which is to say a recovery marred by an unusual degree of volatility in both the usual data suspects and the interim prices changes for capital and commodity markets.
Last week’s wild ride in the stock market is a sign of things to come. There’s a recovery bubbling, but the easy part is behind us. Bouncing off of apocalypse lows in late-2008 and early 2009 has been replaced by the hand-to-hand combat of street battles, in which the forces of growth have to work harder to keep deflation at bay. Given the nature of the Great Recession, and the magnitude of the losses and the resulting debt load on the global economy, there will be setbacks at times that unsettle the crowd and raise doubts anew. Last week’s deflationary signals are an example.
A fresh reason for doubt is always in season, of course, but the risks are higher this time around because the recovery is quite a bit more precarious. How could it be otherwise when governments the world over have moved heaven and earth to engineer a reflation to match the deflation of 2008/2009? So far the efforts have succeeded in keeping the economy from going down the sinkhole, but it’s going to take even greater exertions to keep the nascent and vulnerable rebound on track. Meantime, the payback will likely diminish.
Recovery? Yes. But it’s not going to be easy, and at times it’s going to be downright difficult. This is actually good news for strategic-minded investors, assuming they keep some cash on hand and have the discipline to engage in some buying when the world is selling. There will be no shortage of opportunities in the months ahead. Alas, discipline of this type is rare. Therein lies a key reason why some risk premiums among the major asset classes are still positive, depending on the day.