By Scott Howard, Economist, Macroeconomics, RISI
BOSTON, MA,
Jan. 7, 2010 (RISI) -
This is the time of year when everyone allotted a few words in the mainstream media, blogosphere or anywhere else reflects on the past year and predicts what will happen in the next. The predictions range from the mundane and vague to the outrageous, with the former having a much greater chance of coming true. Part of me wants to climb out on a limb and forecast the breakup of the European Union or $200 oil, but the reality is that things in 2010 will probably be far less exciting or newsworthy.
In some ways that is comforting. Last year, the entire world economy was reeling from a global financial crisis, firms were shedding jobs at a rapid rate and asset prices were plummeting. If you're someone who tends to see the bright side of things, "less exciting" will sound pretty good compared to recent experience.
But by most measures, the US economy is supposed to be in the recovery stage after the deep recession. Usually the recovery stage following a US recession means a few quarters of five, six, even seven percent growth and so far we have had 2.2% in 3Q09 and our estimates show an even slower pace in 4Q09 (and that huge snowstorm that froze the entire northeast on the last weekend before Christmas is certainly not going to help the consumption numbers).
In truth, the principal forces that turned growth positive in 3Q09 were mostly policy-related. The "cash for clunkers" program provided a temporary boost to car sales, the dispersion of stimulus funds accelerated and the first-time homebuyer credit pushed otherwise reluctant buyers into the market (and the record low mortgage rates helped, too). When those policy measures expire, what happens?
Well, we know what happened when the cash for clunkers incentive ended. Sales fell by 34% in September and have only crept back a little since. Oh, by the way, from 2000-2007 auto sales averaged 17.2 million units per year so even the recent jump in the data didn't come close to the "old normal." If the homebuyer credits are allowed to expire, there is little reason to doubt that we would see a similar fall in existing home sales from the current levels.
As far as the $787 billion fiscal stimulus package passed almost a year ago, only $158 billion has been dispersed so far and we can expect the greatest effect from the legislation to be felt in 2010. This is good news for a private economy that has not been able to generate significant domestic demand on its own.
It doesn't seem likely that Congress will pull the plug on any programs in the near term either. Mid-term congressional elections are coming up next fall and I think politicians will be more inclined to keep the stimulus taps flowing and do everything in their power to combat joblessness. I suppose there is a chance that voters will say enough is enough to massive government spending programs and politicians will listen ahead of the elections, but I won't be holding my breath when the dataflow reveals ongoing weakness into early 2010.
The performance of the US economy in 2010, in our view, will still depend heavily on policy measures. With US domestic demand clearly weak at this point, can US policymakers succeed at driving a recovery in 2010? The answer seems to be simple if not scary at this point: they have to.
