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Posted: December 23, 2009

The economy’s kicked into growth mode

Good riddance to the Great Recession!

Jeff Thredgold

The American economy finally returned to "growth mode" during 2009's second half, fueled in part by extremely aggressive fiscal and monetary stimulus.

Pent-up demand by consumers, combined with stronger global performance, also added to growth numbers. A return to positive U.S. economic growth does not imply that problems with commercial real estate, housing and emotional financial markets are finally behind us, but it clearly helps. The revised 2.8 percent inflation-adjusted annual growth pace during the third quarter
was a major departure from the 6.4 percent real annual rate of decline during 2009's first quarter. A similar 2.6-3 percent real growth pace seems likely in coming quarters.

The longest, deepest, most painful and most pervasive recession since the Great Depression has officially been with us since December 2007. Good Riddance!

Financial realities tied to the Great Recession, combined with aggressive spending by both the Bush and Obama Administrations to stabilize the economy, contributed to a budget deficit of $1.4 trillion during fiscal year 2009, which ended last September 30, easily the largest on record. A similar deficit is likely this fiscal year as well.

Perhaps the greatest challenge to be addressed over the next 12-18 months is how to reduce estimated deficits averaging $1 trillion annually during the next eight years, which are simply unaffordable. The President will face rising opposition to his aggressive spending agenda by more and more members of his own party, many who fear having to defend such spending to voters
in 2010 elections.

For the first time since the Great Depression, total job losses during a recession have wiped out total employment gains during the prior expansion. More than seven million people have lost jobs since the recession began two years ago, with millions more shifted to part-time employment. Even more job losses are expected during the next few months, followed by a mix of good and bad employment reports as 2010 matures.

The current 10.2 percent U.S. jobless rate (a 26-year high) could approach 10.6 percent in coming months. Unfortunately, high jobless rates will be the norm during the next few years, with hundreds of thousands of jobs in construction and manufacturing lost for good.

The Consumer Price Index (CPI) declined 0.2 percent during the most recent 12-month period. This followed a 0.1 percent rise during 2008, the smallest rise since 1954. When all is said and done, most forecasts expect the CPI to rise roughly2.0% in both 2009 and 2010. Where we go from there is the subject of intense debate.

One vocal group of economists sees a Japanese-style deflation unfolding in coming years, tied to weak residential and commercial real estate values, strong productivity gains, major slack in
labor markets, and nervous consumers. The other camp sees major inflation pressures resulting from highly aggressive monetary policy and massive budget deficits.

The Fed's critical federal funds rate, now at an all-time low of 0.00-0.25 percent for a year, will likely remain at that level well into 2010. The Fed has enacted one unprecedented program after another, known as "quantitative easing," to address the near-paralysis that, at times, plagued financial markets during the past 30 months. Whether the Fed will be able to effectively reverse such steps in coming quarters without economic disruption remains unclear.

NOW is a very attractive time to refinance a mortgage or buy a new home or foreclosed property. Mortgage rates for conventional loans have been at or near 40-year lows in recent weeks. Mortgage
finance for higher-priced homes remains spotty in too many communities. Unfortunately, one in four U.S. homeowners are now "underwater" on their mortgages, owing more than the home is worth.
More housing markets around the nation have stabilized, following the most painful downward adjustment to U.S. home values since the Big D. While further price adjustments are likely in markets that simply got carried away during 2003-2007, modest home price gains could become the norm in numerous communities in 2010.

The global economy returned to growth faster than expected during 2009's final few months, led by an Asian resurgence. Renewed growth follows the first global recession since just after World War II. China's economic growth engine reaccelerated in recent months, following weaker performance 9-12 months ago. Powerful growth has been fueled by massive government spending and aggressive bank lending. China is making efforts to boost domestic demand within its economy, while lessening its dependence upon exports.

The bottom line?

The painful and lengthy U.S. recession has finally given way to a reasonable growth pace, although serious challenges remain. We also expect unprecedented budget deficits in coming years, mixed
employment news, modest inflation this year and next, extremely low short-term and attractive long-term interest rates, with stable housing markets -- and an improving
global economy.

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The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is www.thredgold.com/html/leaf.html.
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