[Editor's Note: This is Part II of a two-part story that looks at the prospects for the U.S. economy in 2010. It's part of Money Morning's annual "Outlook" forecasting series. In the days and weeks to come, watch for additional installments addressing the 2010 outlook for gold, oil, banking, foreign markets and other key topics. Part I of the U.S. economy forecast story appeared yesterday (Tuesday). ]
It's no secret that government spending has been fueling much of the growth in the $14.2 trillion U.S. economy. And if consumers aren't ready for the handoff when that stimulus spending winds down – and they certainly don't appear to be – it will be up to the U.S. business sector to carry the ball.
And it's not at all clear that Corporate America is ready, willing or able to fulfill that role.
For one thing, companies just aren't hiring en masse. That means the current economic rebound is actually a "jobless recovery," and could be vulnerable to unforeseen shocks, San Francisco Fed President Janet Yellen told an audience during a speech in Phoenix, Ariz, earlier this month.
"Unemployment could stay high for several years to come," Yellen said during the speech that was given less than a week after the U.S. Federal Reserve left interest rates unchanged at near zero. "High unemployment, weak job growth and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery."
U.S. Businesses Throttle Back on Spending Plans
Even though a recently released government report showed that the U.S. economy grew at a 3.5% annual rate in the third quarter, 75% of economists polled in a separate survey concluded that the gross domestic product (GDP) number will be revised downward in the future. The key reason for that belief: The U.S. unemployment rate is expected to keep rising in the new year, heightening the prospects of a jobless recovery.
In fact, 16% of small-business owners surveyed by the National Federation of Independent Business said they are planning to cut jobs in the next three months – nearly double the number of those planning to add jobs.
"The 'job generating machine' is still in reverse," the federation said.
A survey of 1,537 chief financial officers in the latest Duke University/CFO Magazine Global Business Outlook Survey showed that most large U.S. companies do not plan to increase capital spending in the near future.
Furthermore, 56% of U.S. companies say they are still being adversely affected by credit-market conditions. Among those negatively affected, two-thirds say the cost of credit is their biggest problem, and half say credit is simply less available. That can't help but stifle GDP growth.
"For full economic recovery we need to see capital spending increase by double digits, rather than simply treading water as we're seeing now," said John Graham, a finance professor at The Fuqua School of Business who is also the director of the CFO Magazine survey.
Most firms will take several years to return to pre-recession employment levels and some expect to operate with permanently reduced workforces. Unemployment could reach 10.5% before leveling off in the third quarter of 2010, further crimping consumer spending.
"We'll see a steeper decline in investment and business structures and a little less growth in residential investment," said Randell Moore, editor of the Blue Chip Economic Indicatorsnewsletter.
Money Morning's Outlook: U.S. businesses – big and small – have embraced a leaner, lower-cost mindset that leaves firms reluctant to hire and reticent about making capital investments other than those that can't be avoided. That will prolong the jobless recovery, and result in lower contributions to U.S. GDP growth by both consumers and businesses. But there is a benefit. With this newfound frugality, companies should be able to maintain – or even boost – profitability, even during a sluggish revenue environment. That, in turn, could be good for U.S. stock prices, and for the ongoing stock-market rebound.
Unemployment Handcuffs the Fed
In an effort to get the economy on its feet, the government so far has put up at least $3.27 trillion in stimulus programs, including the American Recovery and Reinvestment Act and the Troubled Asset Relief Program (TARP).
According to Standard & Poor's Inc. (NYSE: MHP), only about a third of the $787 billion stimulus package has hit the U.S. economy. Most of the infrastructure spending is just getting started now after being delayed by both the political and bidding processes.
Additionally, the Federal Reserve since last March has kept the benchmark Federal Funds rate for overnight lending to banks at between zero and 0.25%. More recently, the Fed has promised to keep rates "exceptionally low" for "an extended period."
The unemployment rate has never peaked inside a recession and the Fed has never raised interest rates while unemployment was still rising. That means that all signs point to the central bank continuing its current lending programs until unemployment starts to subside.
Despite the U.S. dollar's decline and the recent surge in the price of oil, gold and other commodities, the fear of inflation is probably unwarranted, U.S. Federal Reserve Chairman Ben Bernanke and other policymakers contend.
Economists who subscribe to this viewpoint say that inflation is currently at acceptable levels and overcapacity will continue to cast a long shadow over the housing and labor markets. Some believe we might even see deflation within the next 18 months.
Just yesterday (Tuesday), in fact, the Labor Department reported that "core" producer prices – which exclude such volatile items as food and energy – posted an unexpected moderate decline for October. The 0.6% decrease for October followed a 0.1% decrease in September. That surprised economists, who had been expecting core prices to increase 0.1%.
However, overall producer prices increased 0.3% in October after an unrevised 0.6% drop in September. Big jumps in food and energy prices powered the increase. Energy prices soared 1.6% in October after falling 2.4% in September, while food prices also rose 1.6%, after a 0.1% decline the month before.
"Core producer price inflation accelerated above 4.5% during the boom in the latter part of the previous cycle, but plunged during the recession," FTN Financial Group Chief Economist Chris Low said in an interview with RTTNews. "Core producer prices tend to bottom a year or two after recessions, so there is still disinflation to come at the wholesale level."
But there's another school of thought – one that says that the policies now being followed will fan the flames of inflation and cause an inflationary conflagration the likes of which the country hasn't seen since the 1970s and early 1980s. If that inflationary escalation comes while unemployment remains high it could turn into "stagflation," a culprit that's hard to vanquish once it's gone to ground.
A report on consumer prices will be released today (Wednesday). Economists expect overall consumer prices to increase 0.2%, with "core" consumer prices rising 0.1%.
Regardless of what school of thought you subscribe to, look for the government to keep the pedal to the metal. The Fed won't hike rates before late 2010, most likely after the mid-term elections. And while talk of a "second stimulus" is surfacing once again, it's also possible that any additional spending programs will be put on the back burner by the burgeoning $2 trillion deficit, which is approaching 10% of GDP.
Money Morning's Outlook: Fed policymakers are in a tough spot: Raise rates too soon and they choke off the recovery; wait too long to boost borrowing costs and they've spawned potentially ruinous inflation – and possibly even stagflation. Investors will need to spend some serious time watching the Fed in the New Year, while closely tracking such statistics as unemployment and commodity prices.
[Editor's Note: Part I of Money Morning's U.S. economic analysis of what's to come in 2010 appeared yesterday (Tuesday). To read that story, please click here. Part I focused on the overall outlook for growth in the New Year and examined how the "jobless recovery" would impact consumer spending.]
News & Related Story Links:
- Money Morning:
Jobless Recovery Category
- Reuters: .
- Los Angeles Times:
Obama to hold job forum in December
- Money Morning:
Unemployment Rate Cracks Double-Digit Barrier at 10.2%, Boosting the Odds of a "Jobless Recovery"
Small-business owners skeptical of recovery
- CFO Survey:
CFO optimism improves, but employment outlook is bleak
What comes after 10% unemployment?
U.S. jobless rate to peak at 10.5 pct, Fed on hold – poll
Fed's Yellen see signs of jobless recovery
- Standard & Poors:
U.S. Economic Forecast: Panic Is Being Replaced By Fear.
- Knowledge@W.P. Carey:
2010 Economic Forecast: Don't Hold Your Breath
- Naroff Economic Advisors:
Monthly Economic Review.
The Road Map to Recovery: Leading Economic Indicators.
- Duke University Fuqua School of Business:
Official Web Site.
- Money Morning Week Ahead Column:
Is a Second U.S. Stimulus Package Headed Our Way?
Federal Funds Rate.
- RTT News:
Core Producer Prices Show Unexpected Decrease In October.