AP survey of economists show increasing pessimism in long-term projections
posted at 10:05 am on August 23, 2011 by Ed Morrissey
Actually, the news from the AP’s survey of economists isn’t quite as pessimistic as JP Morgan’s long-term predictions earlier this month. The global financier’s projections showed a US growth rate for 2011 of just 1.5% and 1.3% in 2012, with unemployment increasing to 9.5%. AP’s survey predicts something closer to the mid-2s for the next two quarters and all of next year, with weak consumer spending being the main problem:
— The likelihood of a recession within the next 12 months is 26 percent. In June, the economists had put the likelihood at 15 percent.
— The economy will inch ahead at an annual rate of 2 percent in the July-September quarter and 2.2 percent from October through December. Though stronger than the growth for the first half of 2011, that isn’t enough to lower the unemployment rate much, if at all. And next year will barely be stronger.
— Weak consumer spending poses a “major” risk to the economy. In June, Americans cut their spending for the first time in nearly two years. And consumer spending fuels about 70 percent of the economy.
— The unemployment rate will end this year at 9 percent and 2012 at 8.5 percent. Those rates are slightly less than July’s 9.1 percent. But they’re more consistent with a recession than a recovery.
— The Fed’s efforts to keep interest rates at record lows may not succeed in promoting growth or easing unemployment. But its low-rate policies will likely boost stock prices.
The economists do foresee economic growth, job creation, consumer spending and home prices all rising over the next year. But the gains they expect are so slight that many Americans won’t notice.
The AP also says something curious about market psychology driving the pessimism:
What makes a solution so difficult is that the fear gripping investors isn’t just a symptom of economic distress; it’s also a cause of it. Sinking stock prices frighten consumers and businesses. They then spend and invest less. Investors respond to lower corporate sales by selling stocks, worsening the market declines.
That’s just nonsense. Later in the same article, the AP reports that consumers in this country lost an aggregated $7 trillion in asset value in the economic collapse and are now saving rather than spending to restore their personal wealth. Consumers want to hold onto income rather than spend it, and have shed almost a quarter-trillion in debt at the same time. We are no longer turning our home equity into ATM machines for impulse spending, a good trend in the long run but one that means a lower level of consumer spending for the foreseeable future.
That’s a big part of the problem, and why the markets have grown fearful. Stock prices had grown before the bubble collapse on the basis of that overheated level of consumer spending that relied on irrational home valuations to feed it. Investors know that a generational lesson on saving money and protecting the family home has just been taught again, perhaps for the first time since the Great Depression, and that consumers are not likely to forget it.
The AP also discusses the Fed and monetary policy, coming to much the same conclusion I have written for months — the Fed is now mostly impotent. The only impact another round of quantitative easing will have is on deflation, which so far doesn’t appear to be a threat. They’ve lowered interest rates to zero and have pledged to keep them there for two years. The problem isn’t monetary policy, which is why the Fed has really been irrelevant. It’s unemployment, and that’s a result of an explosion of regulation and outright hostility towards industry in the US, especially on energy production. We could create hundreds of thousands of jobs, perhaps millions of them, by unfettering energy exploration, extraction, and refining in the US. That would boost rational consumer spending, stabilize the housing markets, and provide for real short- and long-term growth, and get investment capital off the sidelines and into the economy. All anyone has to do is look at the economic boom in North Dakota to figure that out.
If economists are issuing pessimistic predictions through the end of 2012, it’s because they see the solution, too — and realize that Barack Obama will never implement it.