The Economic Outlook for 2009
Return to Daily Investment Interpretations
This will probably be an evolving document as the year
unfolds, but here it is as of December 23rd.
December 23, 2008:
Summary: The economy will probably bottom toward the end of 2009, and will begin a long, slow recovery.
May 9, 2009, Update:
It now looks as though the economy will bottom sometime in the second or third quarter. Recovery may be slow in the West. With its command economy and its enviable financial condition, China may emerge first.
The rest of this document is probably an alternate history, since it deals with projections made last December.
The bad news is that two of our leading economists, Drs. Paul Krugman and Nouriel Roubini, have given their best guesses that our current recession will last through most, or all of 2009, making it the longest (at 24 months) and deepest recession since The Great Depression. (Dr. Krugman is an economics professor at Princeton and the recipient of the 2008 Nobel Prize in economics. Dr. Nouriel Roubini is an economics professor at New York University known for his accurate predictions concerning the current financial debacle.)
The good news is that both economists think that, bad though this recession will be, it probably won't become a depression.
Dr. Roubini expects, "a cumulative fall in output from the peak of 4 to 5 percent. Just to give you a sense, in the last recession, the cumulative fall in output was only 0.4 percent—this one is 10 times deeper. The unemployment rate will peak at above 9 percent sometime in 2010." (taken from a U. S. News and World Report interview with Dr. Roubini that took place on Wednesday, December 16th, 2008.) Both Dr. Roubini and Dr. Krugman agree that if the government makes the right moves, the economy should begin to recover in early 2010. Then, as Dr. Roubini puts it in his interview, "The only risk is that the recovery of growth could be so weak that it feels like a recession even though we are technically out of it." Dr. Roubini thinks there is a one-third chance that the U. S. could end up like Japan, with a decade of economic stagnation, but he thinks that we have a two-thirds chance that the economy will recover after 24 months of recession.
Paul Krugman's article focuses upon the fact that the recovery, when it finally comes, will depend upon savings for investment capital rather than upon borrowed and leveraged money. As such, it sounds like Nouriel Roubini's recovery of growth so weak that it feels like a recession. Dr. Krugman's key point is that it may take a long time to revitalize the U. S. economy.
Dr. Roubini expects an additional fall in home prices of 15% to 20% in addition to the 25% fall from their 2006 peak that has already occurred. He sees another downside to U. S. and global equities of at least 15% to 20% from current levels. He thinks that about only half the $2 trillion in credit losses that will occur has been recognized. "We are still in the deepest part of the credit crunch." "We are nowhere near the bottom."
From Dr. Roubini's website comes the following reprint: Fortune magazine: 8 really scary predictions for 2009.
What I find comforting about these predictions is that they are made by some of the more pessimistic (and, so far, more accurate) mainstream economists, and they aren't that bad. Another year of recession followed by a slow recovery wouldn't be fun, but it wouldn't entail a breakdown in law and order. The unemployment rate hit 10% in the 2002-2003 recession, and the country and the markets recovered from it. (Of course, the 2002-2003 recession was a conventional inflationary recession.) Even the Great Depression wasn't that noticeable to those of us who grew up in it. (We scraped by just before paydays, and scrounged pennies, nickels, and dimes from chairs and the sofa to finance trips to the Tip Top Hamburger Shop, and we laughed about it.) But everybody got by. And this was before there was Social Security, Medicaid, Welfare, and unemployment compensation. We built model airplanes and had bikes and lots of toys to play with. We took vacation trips every summer. More party food was home-cooked and homemade than today, but that worked fine (at least for us kids who didn't have to prepare it). It was jolly having everyone around the piano singing.
Even though a recovery may be slow, the stock market is apt to make a huge rise as it rebounds from very depressed levels. The name of the game is to have cash intact to buy back into the markets after they finally bottom. Dr. Roubini recommends holding cash for the next few months as debt continues to unwind.