You spoke at a seminar at Simsbury Bank on Oct. 27 about the mid-year outlook for 2009. What is the mid-year outlook for 2009?
Recent economic data indicate that the economy began growing again this summer, ending the longest, deepest recession in the post World War II era. I agree with the consensus view that recent growth in manufacturing activity, retail sales, industrial production, housing starts, and an improvement in consumer confidence are all indications that the economy is growing and the recession has ended. All economic news, however, has not been upbeat. Unemployment is a particular concern, with the national rate nearly 10 percent and the Connecticut rate over 8 percent. Despite recent increases in new housing starts, we have not seen meaningful increases in sales of existing homes, home foreclosures are still an issue and median home sale prices continue to decline.
We are seeing clear signs that the economy is improving, but there are currently no indisputable indications of an impending robust recovery. Over the next several months we are likely to see slow improvement in labor market conditions, modest gains in consumer spending, a muted recovery in the housing market, all leading to a restrained pace of recovery in overall economic activity. We are at the beginning of a slower-than-typical recovery following a very severe recession, but the worst of the economic and financial crisis is behind us.
What are some areas that are going to surprise investors, both good and bad, in the next six months?
As long as the economy remains in a somewhat fragile state, the Fed is committed to remaining very accommodative. This means interest rates may remain at historically low levels over the next six months, and possibly even longer than most expect. This is good news if you are a borrower, but not so good news if you are looking for a high return on a deposit account. The real surprise, of course, would be if interest rates rise very rapidly over the next six months. While few, if any, expect this to happen, investors would be wise to consider this alternative scenario in structuring their portfolios. A rapid rise in interest rates would very adversely impact the value of fixed income securities.
Is there going to be a repeat of 1970s inflation?
Many of the fears of an increase in inflation stem from the economic and policy conditions today that in some ways are similar to the high inflation environment of the 1970s and early 1980s.
While some of these comparisons are valid, on balance the economic and policy backdrop today is far less “inflation friendly” than the economic and policy setting in the late 1960s and early 1970s that fostered the rise in inflation. A key reason why a severe bout of 1970s-style inflation is not likely for the U.S. economy in the years to come is excess capacity of both labor and capital in the global economy. The emergence of China as an economic power has been a big factor in the creation of excess capacity.
Does Connecticut bounce back quicker from the current malaise than the rest of the country? Or, is our recovery going to be slower?
Connecticut was not an aggressive participant in the housing boom-bust cycle that caused the early phase of the recession. Consequently, the recession began later in Connecticut and has not been as severe, at least in terms of unemployment, as the national average.
However, it will take some time to regain the approximately 70,000 jobs that have been lost in Connecticut over the past year.
