Economy.com Liveblog - Zandi's Economy Outlook

9:05 7 Questions to audience.

9:15 Recession was 2x (-4% vs. -2%) worse than average, recovery half as good as average.
Job losses were more than double the average. Unemployment increase was double average.
End of recession and pace of recovery is due to federal response.

9:23 US economic stimulus amounted to 7% of GDP; China's was 13% and truly "shovel ready", also huge monetary stimulus (?)
Fears of protectionism are proving unfounded.

9:25 Current outlook for 2010 growth has risen 1% (to 2.9%) from a year ago.
Why? Consumers spending more than forecasted.; top quintile spike in saving rate to >15%, but has fallen back below 5%. (top decile accounts for 23% of consumer spending)
Nest eggs being rebuilt (slide 6), driving new "wealth effect" among high end and "relief spending"
Normal rate of spending ahead will imply lower contribution to GDP later.
Spending among middle/lower brackets increasing also because of decline in delinquency below pre-recessionary level (bad stuff has already happened, credit standards have tightened.

higher spending growth somewhat due to people not paying their bills???

9:35 Shape of recovery
Avoid double-dip
2010 3%, 100k job growth
2011 4%, 200k
2012 5% 300k
Need 150k monthly job growth to bring down unemployment rate

End of 2011 8.5%
YE 2012 7%
full employment (5% or so) not until 2013

9:40 much stronger job growth later in 2010 (historical profit/job growth trend implies 350k, but many risks

Reasons for optimism

1. corporate balance sheets improving for big business: quick ratios (liquid assets to s.t. liabilities) improving sharply (highest on ratio), interest coverage ratios declining. productivity gains were huge (YOY productivity growth was >6%, close to highest ever), but compensation growth was very low. Bottom line is that US labor is very cheap relative to output...
2. Pent up demand (how does this square with higher than expending??) Pent up vehicle demand... GM "investment" will pay off. Housing inventory has peaked, household formation is around 800k (usually around 1.25mil). 1.5 mil in excess inventory, demand exceeds supply by 750k - 2 years until recovery. 2012 and 2013 will be very strong construction
3. US unit labor costs are low (germany is the only developed country lower), when currency changes are incorporated, the dollar weighted US unit labor cost is very competitive. Exports, especially manufactured exports will thrive
4. Low fed rates, if double-dip recession looms, federal action will likely be aggressive ("appropriate federal funds" rate = federal funds rate and other actions taken to push liquidity, now at -2%), interest rate raise not until 2011.
5. Congress will pass extension of unemployment benefits, aid for state and local governments (25-30 bil). failure to do it may result in much higher state and local taxes that could undermine economic growth.
6. 1 Trillion in stimulus when all told (should have gotten that a year ago).

9:55 Threats to outlook

Outlook expressed so far still very much a forecast. Hiring at a low (4 mil/mo, vs 5 mil/mo pre-recessionary average

1. Small businesses struggling to get credit (12-14% complaining), can't get cash to be able to hire. traditionally small business is a hiring machine (account for 2/3 of job creation after the last recession). Small business confidence is still very low (NFIB is the source, what happened to economy.com's business confidence survey?)
2. Foreclosure threat; close to 4.5 mil mortgages are >90 days delinquent or in foreclosure... negative equity and under employment, strategic default (able to make payments but won't because they are so far underwater they are better off defaulting...
3. house prices will fall by another 5%by 1Q2011 Biggest reason banks won't loan to small business is the threat of collateral losses
4. State and local government revenues collapse, expenses grow (to support people who have lost jobs)
5. Commercial RE prices (stabilized for now). Loan defaults ahead will hit banks, constrain credit expansion (short shrift given to this topic)
6. Structured finance is still dysfunctional. Only credit cards and auto loans are anywhere near '00-'07 average
7. Fiscal challenge is biggest challenge. Debt-to-GDP ratio has doubled with stimulus action, new budget is the first one that doesn't get back to "fiscal stability" Biggest assumption is that this chart will change, enabling interest rates to stay low. Catalyst will be a "greek-lite" event to push us to deficit reduction brink.

Self sustaining expansion begins in 1Q-2Q2011, fiscal "event at 4Q2011.

10:40 Questions

Dollar is appropriately valued (undervalued against the yuan). Chinese will revalue based on basic economic theory (rein in bubbles and hyperinflation) Beginning later in 2010, Chinese will revalue the yuan by 3-5%

New post recessionary economy? US consumers won't drive global growth. New potential GDP growth rate? Need improvement in investment spending. Though positive, growth is not enough to replenish the capital stock. (Zandi thinks potential is 2.75%, .75 is labor force growth, 2% is productivity growth)

What is the possibility that the European debt crisis could envelop us? Should be contained. EU bailout should last Greece 2 years to resolve their crisis. Doesn't seem to be enough, but there would probably be further action. ECB could try to inflate their way out, but it's a short-term solution and could have repercussions for debt availability for ALL Europe. European economic growth will definitely be weaker and might reduce demand for US goods. Could push dollar up against the Euro.

Yield curve will stay very wide for the next few years. "Flight to quality" will persist.