Short Term Predictions

Short Term Predictions

It is possible, but I doubt it, that we will have a small rise in GDP this summer or early this fall. The greater likelihood is that there will be a small rise in GDP after the effects of the stimulus take place and this will happen late in the year or, more likely, in 2010. But unemployment will probably hit double digits this summer and approach 15% before a genuine recovery takes place, especially if, as I expect, the "genuine" recovery will never be a strong one. And I am referring to the official unemployment rate, which excludes part time workers who want to work full time and excludes those who would look for a job but believe it is hopeless.

The standard estimate of unemployment at the depth of the Great Depression is 25 %. Then, we didn’t collect data month by month as we do now, so all we have are retrospective estimates. But I have read that unemployment in cities was in the low 30's. Also, the estimates probably do not take into account, or do not do so fully, the fact that many went back to farms, where they were pulling weeds, but not really employed.

I suspect that by summer it will be realized by the Obama team that some banks have to be nationalized, whatever name is given it, and that a second stimulus is needed. Politically, this will be difficult. But Obama will then have two choices–unhappiness over the continued recession and/or weak recovery or unhappiness over having the government play the larger role it will have to play. Nationalization in March and a greater stimulus, which would have been obtainable, had Obama not been obsessed with the need to be, or appear to be, bipartisan, would have been the best for Obama and the Democrats in the longer run, since it would do more to get us out of this disaster than what they have chosen to do–unless the bank bail-out works better than most believe and/or the stimulus stimulates more than most believe.

I have a bet with a friend that the Dow will hit 6,000 before it hits 10,000. Recent recovery notwithstanding, I think I have a 50-50 chance of winning. I guess it depends on whether we are having a "dead cat bounce."

In short, [1] investment is weak because: (a) consumption is weak and (b) businesses can’t get loans [Aside: there are always new industries that pop up and help, and this will occur (although raising the money for them is a problem) but the amount needed is much higher than usual, so unless something spectacular appears, which is unlikely, this positive is nowhere in sight.];
[2] consumption is weak since not only are incomes down for so many–unemployment and shorter weeks--and others are scared, but the ability and willingness to borrow is down; [3] exports will remain weak. This exhausts the GDP (not counting imports, which are made elsewhere), except for Government. State and local government cutbacks are enormous, so in the end, given the banking situation, it all depends on the stimulus and the willingness to increase government expenditures even more. [Tax cuts could also work but you need to run an even larger deficit to get a designated amount of spending (or jobs created).]

LIKELIHOOD: WEAK RECOVERY BEGINNING IN LATE 2009 OR 2010. THE QUESTION THEN BECOMES, WILL THERE BE A RELAPSE OR WILL THE RECOVERY GAIN MOMENTUM? NO ONE KNOWS, OF COURSE, BUT I STRONGLY SUSPECT THIS DEPENDS ON THE ABILITY TO HAVE A SIGNIFICANT 2ND STIMULUS AND A FUNCTIONING BANKING SYSTEM BROUGHT ABOUT BY "TEMPORARY NATIONALIZATION."