Plenty of Reasons for Economic Optimism

The recent downward revision of 2010 second quarter economic growth rate from 2.4 percent to 1.6 percent has once again heightened the buzz about a double dip recession. I think that it is premature to talk about the reversal of the economic recovery that started middle of 2009 based on data for one quarter.

The Fed’s official forecast of economic growth for 2010 is in the 3 percent to 3.5 percent range. The latest Economist magazine forecast for 2010 also stands at 3.0 percent. These by no means are stellar numbers but clearly indicate a modest recovery from the worst recession in our lifetime.

My concern is that continued cynicism and pessimism about the future of the economy may become a self fulfilling prophecy. It is one thing to describe a situation as a glass half empty but to deny the fact that the glass is half full is a highly risky state of mind.

A recent study by the Milliken Institute of Los Angeles concludes that the American economy remains flexible and resilient and will continue to perform modestly and remain sustainable. The study forecasts real economic growth for 2010, 2011, and 2012 at3.3 percent, 3.7 percent, and 3.8 percent respectively.

To me the all important numbers are job growth as that is our fundamental personal connection to the economy. The Milliken Institute forecast on job growth for 2010, 2011, and 2012, respectively are1.5 million, 3.1 million, and 2.6 million. This is welcome news but still does not make up for the more than 8 million lost jobs in the recession. Job growth will continue to be America’s number one challenge in the coming years. It is now a serious structural problem and not just a traditional cyclical issue. It will be a while before we return to a new “normal” in the level of employment.

There are several factors that bolster the conclusions of the Milliken Institute forecast. These include:

1 – Strong uptick in US exports because of rapid growth in Asian economies such as China and India with 2010 economic growth at 9.9 percent, and 8.0 percent respectively. Other Asian economies with strong economic performance in 2010 include Indonesia (5.9 percent), Malaysia (8.8 percent), Singapore (12.3 percent), and South Korea (6.3 percent).

2 – The European sovereign debt crisis, which several months ago triggered the initial buzz about a US double dip recession has abated considerably as indicated by a recent business and consumer survey of the Euro countries that suggests widely felt optimism about the region’s improving economic situation. The 16 member Euro Zone expanded at an annual rate of 3.9% with Germany leading the pack with an economic growth rate of 9 percent in the second quarter of 2010 (WSJ, August 31,2010). Steady job market and declining unemployment in Germany, Austria, Finland, and Italy will give a boost to the consumer goods industry. Stronger economic performance in Euro Zone will soften the adverse economic impact of budgetary austerity currently being pursued by the Euro economies.

3 – Beyond the 16 country Euro Zone, the United Kingdom has outperformed the US economy in recent months, and Sweden expects a healthy economic growth of 4.5 percent this year.

4 – The US Conference Board’s Confidence Index for August 2010 rose 2.5 points to 53.5 from 51.3 in August beating analysts’ expectations. This is good news for the sale of consumer goods.

5 – In addition rising US business confidence is resulting in robust spending on software and equipment.

6 – The US manufacturing industry has continued to expand for the last thirteen months. The Institute of Supply Management‘s (ISM) manufacturing index rose to 56.3 percent in August 2010 from 55.5 percent in July 2010.(A number above 50 indicates expansion).Key factors driving manufacturing in recent months include the rise in exports as well as business spending on capital equipment and supplies. I think that the steady rise in the manufacturing sector has been a key driver of the current recovery.

7 – The latest job data from the US Department of Labor reports that private employees added 67,000 new jobs in August 2010.This was more than the 41,000 expected by a poll of professional economists taken by the well known Thomson Reuters firm. The other positive jobs news from the Labor Department included upward revisions to June and July jobs numbers.

8 – Interest rates have been at record low with the core CPI at 0.9 percent. With inflation for 2010 expected to be around 1.7%, the Fed has been able to keep short term interest rate (Fed Funds rate) slightly above zero, which translates into a negative interest rate if we figure in inflation. This has encouraged economy wide borrowing. There is a good chance that the Fed Funds rate will remain low well into 2011 as inflation is not likely to be a threat at least in the next 16 months.

Finally, let me suggest that a double dip recession now is unlikely. History is on our side. Robert Shiller of Yale University in a May 2010 New York Times article stated that in the past when a recovering economy has recorded three consecutive quarters’ of real GDP growth, it has never slumped back into a recession after a short interval. This has been the case since 1947 when quarterly economic data series were initiated.

The good news is that so far in this recovery we have had four consecutive quarters of real economic growth (GDP) and the economy continues to grow at a modest rate. There is sound basis for Shiller’s observation. Giant economies are like freight trains; they do not stop suddenly on their tracks.

If we have a double dip recession I think it will probably happen because of self fulfilling prophecy based on fear and pessimism.

Economic recoveries such as the current one that is following a brutal recession triggered by the bust of two of our major economic sectors – housing and finance – do not proceed smoothly. Encountering potholes and road bumps should not surprise us as we continue on the road to recovery.

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