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What risks threaten our recovery

December 7, 2011

CLU Center for Economic Research & Forecasting
Oregon Economics

Forecasting is always difficult. It is even more difficult when the data keep changing. This year, we’ve been plagued by very large adjustments to GDP data. Most have been downward adjustments, but a few have been upward adjustments. Productivity has been the source of most of the changes. Jobs data get revised too, but we haven’t seen revisions near the size as we’ve seen for GDP, and GDP growth is the sum of employment growth and productivity growth.

Recently, the initial estimate for 2011’s third-quarter GDP growth was revised downward from a 2.5 percent annual growth rate to only a 2.0 percent annual growth rate.

Still, even a 2.0 percent growth rate represents a nice pickup from the extraordinarily weak first two quarters. Unfortunately, much of that improvement came in the form of productivity growth rather than job growth.

It confirms our judgment last summer, when we expected the Country to avoid the second dip so many forecasters expected after the August data revisions to the first two quarters’ GDP data.

That doesn’t mean we’re out of the woods yet. The probability of one of both of two very serious events that we’ve been warning about for months seems to be increasing daily.

A significant interruption in oil supply from the Middle East would have catastrophic impacts on Western economies. The probability of such an interruption is becoming alarmingly high, in our estimation. A week or so ago, there were headlines that a natural gas line in Egypt was sabotaged, the Kuwaiti government has collapsed, and Syrian atrocities are continuing, perhaps increasing. The likelihood of an oil-supply interruption is high, and the economic impacts of an interruption are very serious. Economic recession will affect all developed economies.

The other risk is a financial crisis associated with the breakup of the Eurozone. While the markets are giddy today with the prospect of yet more Eurozone bailouts, the bailouts are only bandages.

Fundamentally, the Eurozone is a contradiction that cannot be sustained. Some countries will have to leave it. When they do, there will be losses. Financial institutions and governments will face stresses not seen since September 2008. The resulting recession will be serious and widespread.

  
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Bob Clark December 7, 2011

The U.S has been making some improvements on its dependence on imported oil from the likes of the Middle East what with domestic production of oil edging steadily higher and natural gas production up substantially. What would lessen dependence on the Middle East even more would have been if Obama would have allowed the Keystone XL pipeline out of Alberta Canda to have been built, instead of further delaying it. With this pipeline, oil imports from other parts of the world would have dropped by some 10%. But no. Inorder to placate his radical environmentalist base, Obama seeking re-election had to hold up the pipeline. These radicals make no sense. Canada will now look to export their oil using Ocean going vessels with even greater negative effects on the environment than the pipeline. Moreover, the higher level of dependence on Middle East oil makes chances of U.S military involvment significantly higher than otherwise.

We are are own worst enemy at times.

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