US ECONOMISTS APPEAR “BULLISH” FOR NEXT 24 MONTHS, BUT……

 

They give the US economy a tentative “thumbs-up” and agree that the recovery appears real.

Well, all the news organizations, (except Fox of course), are saying that 2015 may be the first year since the Great Recession that the average American will start feeling the economic recovery.  I am hopeful that they are correct, but it’s important that everyone recognize that there are many things that could interfere so “Buyer Beware”.  The hope is that in spite of Fox News, the feeling will continue to be positive, especially if it continues up to the 2016 elections.

But here are some of the issues to keep your eye on:

·       The nation’s GDP (gross domestic product) of $17.6 trillion is, after adjustment for inflation, only 8.1% higher than its peak in the fourth quarter of 2007.

·       Employment of 140 million in November 2014 exceeded January 2008’s, 138.4 million by a mere 1.2%.

·       Industrial production in November was only 6.7% higher than the 2007 average.

·       New housing starts of nearly 1 million units in 2014 were about half of 2005’s peak of 2.1 million units. (However, overbuilding in the early 2000s actually contributed to the financial crisis.)

·       At 5.8% in November, the unemployment rate remains well above the low of 4.4% in May of 2007.

Even with all this, the forecasters are saying it looks pretty good going forward. 

IHS Economics, a major forecasting firm, predicts that GDP will grow 3.1% in 2015 and that monthly job creation will average a solid 230,000. If these gains occur, 2015 will be the recovery’s best year.  Since 2010, annual GDP growth has averaged only 2.2%.

If unemployment continues to fall, the theory goes, competition among firms for scarce workers will eventually trigger a wage-price spiral. The precise unemployment rate for full employment an uncertain percentage and is highly controversial, though the range is usually put between 4% and 6%. In order for the true American “Middle-Class” to continue to make the next generation fare better than the previous generation, wages must start spiraling upward, which is still a question for most middle-class Americans.

The issue at hand of course is “Will there be any surprises?”  There is a long history of economic surprises, for the good and the bad, which a negative surprise could obliterate any plausible predictions. In 2014, the collapse of oil prices and the war in Ukraine reminded us of that possibility.

Some other threats to the current optimism are staring directly at us. The economist David Levy of the Jerome Levy Forecasting Center has said that there’s a 65% chance that the slumps and slowdowns in Europe, Japan, China and other “emerging markets” could cause a global recession that would ultimately drags down the United States. America’s vulnerability would arise from having weaker exports which would produce reduced foreign profits which represents almost a third of US corporate earnings. 

More importantly, this would also cause a large blow to American consumer confidence.

The Federal Reserve could also poses a major danger if they were to miscalculate on raising interest rates.

The word is that the Fed is widely expected to begin raising short-term rates this year.  The Fed’s rates have been near zero since late 2008.  Fed officials have continued to state that the increases would be small and slow so as not to disrupt the recovery. But if investors have a knee-jerk reaction after so many years of low rates, they could start pushing up long-term rates on home mortgages and corporate bonds.  If that were to occur, the economy could suffer big time. 

An even bigger negative surprise would be if inflation started to increase which historically has caused the Fed to raise their rates more quickly than expected.

Past reactions to these unforeseen calamities has been for the nation to hunker down.  Consumers and corporations usually then start skimping on spending, which as expected, is the largest cause of having a weak recovery.

The question now is whether the almost six years of past hunkering down has had a calming effect.  If no further disasters ensue, and the optimism continues, will the economic malaise be over?

Most economists are say “yes”, but there are other surprises such as another 9/11 type attack, or 100 other actions that could de-rail what the economists are predicting.

Let’s just keep our fingers crossed and hope that all goes well for the next 18 to 24 months and that the economists were correct.

Copyright G.Ater  2015