I threw a rock or two in recent weeks at so-called “professional forecasters” and other self-proclaimed experts who will be offering projections for the months and years to come. Their batting average is undeniably rotten, but I feel morally bound to do more than simply point out others’ failings. I will go out on a limb and do some predicting myself, else be branded one of those most pitiful creatures, someone who finds fault with others but never ventures onto the skinny limb personally. In other words, a critic. God forbid.
So. What economic soup will 2011 bring us? Clear, austere broth, or a hearty stew? My projections follow.
We currently have over $8.5 trillion in accumulated cash (the monetary index called “M2”); corporations, small businesses and households will begin investing those dollars in hard assets like bottom-priced real estate and performing assets (such as capital equipment, commodities under competitive buying pressures and dividend-paying profitable companies).
The people who have been repairing things instead of buying new will begin to bid up high-quality used goods first, then return to buying new when the cost difference reaches less than 25 percent. Savings will continue to stay stronger than prior to the Great Recession, but spending will begin in nonluxury items first. This will spark a modest increase in GDP. I would estimate that annualized GDP will reach a rate of about 2% for 2011, which adds about $300 billion in gross domestic product and 2-3 million jobs, thereby reducing the unemployment rate from its current 9.3 per cent to 7.0-8.0 percent. Unemployment has a strong two-year advance correlation to increases in the labor cost index (LCI), and a somewhat less strong correlation one-year hence. Labor cost increases typically commence when unemployment rates reach 6 percent or less. These higher labor costs show up in retail pricing once material and manufacturing equipment costs cannot be lowered further to offset the rising labor component, assuming demand grows at the same rate as GDP. Therefore, I don’t predict broad inflation to exceed the GDP rate for 2011 and won’t begin to be noticeable until 2012, even if the Treasury continues to print money for deficit spending through the next year, at its budgeted projections.
The number of “qualified” borrowers has diminished greatly as underwriting criteria have swung to the opposite position from pre-2008, so it’s a borrower’s market if you happen to be in a position to satisfy the stringent criteria. Banks don’t make money by increasing deposits, paying even minor interest to depositors and then not loaning money out.
They need to put the money to work to make any profit at all. So interest rates will stay within a point of current levels for most lending categories.
The reality that compromise is required for any progress in any direction at the federal level has already sunk in, and there will be more of that in 2011. Therefore, regulatory trade-offs and centrist policies will be the sausage oozing out of our legislative butcher shop in Washington. This will create strange bedfellows in that the extreme ends of both parties will actually begin to emulate each other in attacking the members of their own parties who do not share the eccentric views. It won’t happen in 2011, but in one of the next three Presidential races, there is a distinct possibility that the right hand of the Left, and the left hand of the Right might form a new party strong enough to carry an election on its own. No idea what name this group might go by. But I’d probably be a member.
Overall, I predict that the hard-working, nonblogging, nonproselytizing segment of our capitalistic democracy will continue to apply sound fundamentals of business and of relationships to correct course and bring our country out of the economic doldrums of recent years. As per customary. I’m sure you all know that 80 percent of all new job creation comes from the small businesses of our country, those that employ less than 500 people, the large majority of which employ 100 or fewer. Half of the entire working population of our country is employed by these small businesses.
A year hence, we shall see if I’m any better at predicting events in our economy than the pros. And I will hold myself accountable for that assessment.
Friday, December 31, 2010