U.S. Economic Outlook: Self-Fulfilling Forecasts?
Published: September 16, 2010 in Knowledge@W.P. Carey
By Lee McPheters
As the saying goes, "If you ask 20 economists about the economic outlook,
you'll get 21 scenarios for what lies ahead." The point is that economists
famously disagree. But the slowing pace of recovery seems to have convinced
a strong majority of analysts that conditions are going to be worse in the next
couple of quarters, and the main arguments now center on just how bad the
economy might get before it gets better.
When this gloomy perspective gets repeated and amplified in the media, there
are some who worry that consumer and business confidence could be so strongly
affected that fears of a double dip downturn could actually become reality.
The consensus collapses
The strength of the wave of pessimism swamping economy watchers can be
gauged by looking at the sharp drop in the consensus outlook reported by two
credible sources, the Wall Street Journal and the national newsletter, Blue Chip
Economic Indicators. Both sources calculate a consensus based on monthly
forecasts from leading corporate, financial, and academic analysts.
Just three months ago (June, 2010) the Wall Street Journal consensus for growth
of inflation-adjusted Gross Domestic Product this year was 3.2 percent. The Blue
Chip panel was similarly optimistic, calling for 3.3 percent growth in GDP.
Now, the most recent consensus figure (September) for 2010 growth from the
Wall Street Journal has collapsed down to 2.5 percent, a drop of more than
one-half percentage point. The Blue Chip forecasters have reduced their
consensus as well, to 2.7 percent growth in 2010.
Among the more than 50 Blue Chip economists, only one forecaster predicts
2010 growth as great as 3.0 percent. All those remaining project growth
between 2.0 and 2.9 percent, not nearly enough to make a dent in current
high unemployment rates.
Consumers are still key
Meanwhile, consumers also have turned pessimistic. According to the
regular consumer outlook report issued by the Gallup Poll on September 12, 63
percent of respondents say the economy is "getting worse." This is a larger
percentage than Gallup reported last year at this time (52 percent "getting worse,
" September 12, 2009).
Consumer spending in the second quarter was up 1.6 percent, about one-half
the average pace of 3.3 percent recorded over the past 25 years. Since consumers
account for 70 percent of GDP, analysts are watching monthly reports on
consumer confidence and sales closely.
A double dip recession is an unusual event in U.S. economic history, usually
accompanied by some sort of external shock. The most recent example was
three decades ago, and could be described as a "quadruple dip." GDP declined
in Q2 and Q3 of 1980, then rose in the next two quarters. After this initial dip and
rebound, GDP contracted and expanded three more times, in fluctuations that
extended over six more quarters. The external force at work in the early 1980s
was a restrictive monetary policy designed to break the back of inflation.
For those worried about a double dip, consumer spending is one key indicator to
watch. Slow growth, even between 1 and 2 percent, is still enough to keep the
economy above water. But if consumer spending declines (as happened in 2008
and into the first two quarters of 2009), quarterly GDP could dip back into the
negative region again.
The W. P. Carey Round Number Forecast for GDP growth in the third quarter has
been reduced to 1.5 percent (see table,
Annualized GDP growth is projected to be 2.5 percent in 2010 and 2011.
Looking ahead, there are no sources of strength sufficient to propel the U.S.
economy forward at anything but a modest pace.
Consumers and business are troubled by a drumbeat of news about how weak
the economy is. Uncertainty about taxes inhibits consumer spending and business
expansion. Business additions to inventory are slowing down. U.S. exports to a
growing global economy are offset by rising imports, which send dollars overseas.
Construction, usually among the first parts of the economy to recover, is in the doldrums.
Somebody once said that "the best cure for recession is recession." The recession
was most likely over in the summer of 2009. What is needed now is a cure for a
recovery that is getting weaker, not stronger.
Reprinted with permission from Knowledge@W.P.Carey. To read more click here.