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Where our economy is going

February 13, 2011

By Bill Conerly,
Conerly Consulting
, Businomics

I have updated my economic forecast, and it looks a little better than it did a few months ago. I have upgraded the first three quarters of 2011. The later quarters have about the same growth rates as before–they were already fairly good growth rates back in my November 2010 forecast.

GDP Forecast 2011

The reason for the forecast revision is that recent data show the processes I had anticipated occuring faster than I had previously thought they would.

The keys to my vision of the economic outlook are:

  • The economy wants to recover. Economic activity is the norm. People want to consume, and are willing to work in order to do so.
  • The Fed’s quantitative easing will work, though with a significant time lag. That’s why my forecast has the greatest growth rates at the end of 2011 and early 2011–about one year after QE2 got started.
  • The world economy is showing good growth in Asia, which helps us. I worry about a European credit crisis triggering a Continental recession, which would probably pull us into another recession. That’s not my base forecast, but a contingency that business leaders should consider.
  • Consumers are slowly opening their wallets. Remember there is tremendous diversity among people. Some have been heavily damaged by the recession, and I’m not counting on them spending much money. Plenty of others, however, have maintained their incomes. They had cut back spending due to fear, but will gradually relax and shop.
  • Businesses have opportunities to use capital investments to lower operating costs, which will spur capital spending.

Sound rosy to you? Here’s another way of looking at it. I compare my forecast GDP with the Congressional Budget Office’s estimate of potential GDP.  Look at how long the gap persists.

GDP Actual Potential

Because of that persistent underachievement, I don’t think inflation will rise significantly in the next few years. The rise of oil and food prices are changes in relative prices, which will not translate into permanent changes in the overall inflation rate.

In this context, the Fed will keep short-term interest rates low. However, global economic improvement will increase the demand for credit, pulling long-term interest rates higher.

RM forecast

This is a broad-brushed summary. I produce more detailed forecasts that concentrate on specific industries as my clients require. Call me for fees and other information.

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Discuss this article

Bob Clark February 13, 2011

I think Bill is being too optimistic about oil price and inflation. Past periods of elevated inflation have been lead by escalating oil price. Oil price seems to be in a secular upcycle with depletion rates rising.

The policies of the current president have stagflation written all over them. (A) Allow more unionization so it takes less of a drop in unemployment to cause wage inflation, which labor is the only missing component currently to the taking off of domestic inflation. (B) Continue subsidizing ethanol so as to rob corn food supplies. (C) Raise the cost of meeting environmental law. (D) Put price controls on doctors’ compensation, causing doctors to retire much earlier than otherwise.

Right now we are in a sweet spot with unemployment still high, reducing labor’s ability to raise wage costs. But material costs are starting to crimp some company profits. The spendthrift ways of the current president still are carrying the economy but this should end over the next year or two.

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