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October 2011
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How Uncertain is the Economy?
Enough to Quiet the ‘Experts’
By Tim Triplett, Editor-in-Chief
 
Most disconcerting about economists’ comments during MSCI’s forecast summit last month was not what they had to say about the coming year, but how little they had to say about 2013 and beyond. Clearly, we are in uncharted territory.

The U.S. economy has grown at a disappointing 1.5 percent pace since the recession technically ended in June 2009, said William Strauss of the Federal Reserve Bank of Chicago. “The normal bounce back from recession is just not happening.”

All the experts gathered by MSCI pointed to three chronic conditions that continue to stand in the way of a healthy economy: poor job growth, a weak housing market and sluggish consumer demand.

The economy has averaged only about 100,000 new jobs a month in the past year, well short of the 300,000 to 400,000 that would signal true recovery, and barely enough to keep pace with the rising population and new entries into the workforce. Most mavens expect only minor improvement in the nation’s unemployment rate in 2012, to perhaps 8.7 percent from the current 9.1 percent. What about 2013? We’ll have to wait and see, they say.

Even though interest rates are near historic lows, mortgage lending is loosening and home prices are down 25 percent or more across the country, the uncertain economy and tenuous job security are keeping most people out of the housing market. New-home construction—an industry that normally creates millions of jobs both directly and indirectly—continues to tread water. Strauss forecasts housing starts will grow from around 593,000 in 2011 to 714,000 in 2012, “well less than half of what trend should be.” How long before housing is back on firm ground? No comment.

The economy’s best hope is for renewed consumer spending, which accounts for 70 percent of GDP. Consumer confidence saw a slight recovery early last month. The University of Michigan consumer sentiment index for early September rose to 57.8 from 55.7 in late August. This is lukewarm, however, compared to sentiment readings in the 70s early in the year. With the personal savings rate up and household debt down, consumers appear to have the disposable income to start spending again. When will that happen? Soon, we hope, say analysts.

Most economists downplay the likelihood of a double-dip recession, in large part because the manufacturing sector remains so strong. The consensus forecast for GDP next year is just 2.5 percent. Beyond that, it seems, your guess is as good as the experts’.

  
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