The Recovery Moving Forward but on Shaky Ground

By Malehorn, Jack | The Journal of Business Forecasting, Fall 2010 | Go to article overview

The Recovery Moving Forward but on Shaky Ground

Malehorn, Jack, The Journal of Business Forecasting

Over the summer, the unthinkable became possible, i.e., the realization that we may be teetering on the unspeakable-a double-dip recession. This assessment is not a forgone conclusion; nonetheless, a plethora of bad numbers has brought forth a clear concern from the White House through Congress to the Boardroom and into the kitchens of most Americans. A cursory review of the forecast numbersindividually or collectively-does not portend disaster. Yet, as often happens with life, there may not be a calamity, but there is a probability that it could, indeed, occur.

Three members of the Consensus Outlook graciously provided their analyses of the ongoing dilemma. Mark Zandi, Chief Economist of Moody's, places the odds of a doubledip recession at 1 in 4. At present, Zandi details a number of factors weighing on the recovery including the fading support of both monetary and fi scal policy, the waning inventory cycle in manufacturing, and the continued fallout from the European debt crisis. Zandi notes two chief areas of concern: Near double-digit unemployment rates and the eroding confi dence of households, fi rms, and investors. Still, Zandi cautions that a return to recession is not likely since big businesses, in general, are fl ush with cash, profi ts are rising, and balance sheets are solid. In turn, households have signifi cantly reduced previous record debt service burdens, strengthened their balance sheets, and are saving at a rate not witnessed in two decades. Unfortunately, the outlook for small businesses is not as bright. Absent fi nancial resources, most small businesses are stymied as they struggle to obtain credit. Given the historic trend of small businesses being the primary engine of job growth in the U.S. economy, this is a major concern. What is most noteworthy in Dr. Zandi's most recent analysis is the alarming position of both key participants in stabilization policies, i.e., the Fed and Congress. Certainly, the Fed can renew its accommodative stance but it really hasn't worked so far. And would Congress really risk going to taxpayers with another major fi scal policy stimulus package given the attention to bloated Federal debt levels?

Ray Perryman of the Perryman Group believes a double-dip recession can be avoided once clarity surrounding future tax policy and the eff ects of the healthcare reform are ironed out.

Dr. Rajeev Dhawan, Director of the Economic Forecasting Center at Georgia State University's J. Mack Robinson College of Business, brings attention to both a double-digit recession as well as a threat of defl ationary price pressures. Dr. Dhawan believes the key to avoiding both is stabilization of housing prices. According to Dhawan, defl ation is being bantered around due to the slowing of private job creation and retail sales, falling core CPI infl ation (infl ation excluding food and energy costs), and a rapidly falling 10-year bond yield that is now below 3%. Dhawan expresses an understanding and linkage between the two events as follows: What happens to home prices over the next few months will be critical to the confi dence of consumers. It will aff ect their spending decisions, especially for big-ticket items. This, in turn, will send a signal to CEOs about whether or not to ramp up their investment and hiring plans, which will then determine potential consumer income growth and ultimately the next round of spending. He further adds that the importance of home price stability is also evident from the fact that one-third of the CPI Index is derived from the housing or shelter costs. If we take shelter costs out of the core, there is no defl ation. Hence, if home prices plunge again, spending power will be sapped, resulting in further price declines that will manifest as defl ation leading to a double dip recession. He does not believe that either event is inevitable. He cites strong growth in investment spending in equipment and software, usual precursors to job growth. …

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