Economic Forecast for 2009, Updated 10/30/2008

Note: an update was posted here in January 2009.

With today's new GDP figures for Q3, I've updated my forecast.  Here's how it looks:
GDP forecast

That last blue column, the slightly negative one, is last quarter's 0.3% decline.  I forecast declines in the current quarter as well as the first quarter of next year.

What will get the economy growing again?  That's the most common question I'm getting in my many speeches this fall.  We have three problems:  1) too many houses, 2) credit crunch, and 3) weak attitudes among consumers and businesses.  Problem #1 won't be solved until we have another year of population growth.  Problem #2 is being addressed by aggressive Fed and Treasury policy; I expect it to get solved (see qualification below) in six weeks or so.  Problem #3 will be resolved by the many, many people who do not lose their jobs.  Right now they are staying away from stores, but after a few months, they'll have paid down credit card balances, or they will have built up their bank accounts.  They will say, "We've avoided job loss in this recession, and we have money, so let's spend."  That happens in the spring.

The Fed starts draining liquidity from the banking system after six months of improvement, then they have to start raising rates quite dramatically to avoid inflation.  Current policy is not inflationary in the current environment (credit crunch and weak attitudes), but it will be inflationary if left in place as credit and attitudes improve.  Thus, look for a sharp tightening beginning in late 2009.

RM forecast

The current policy actions may not prove inflationary, but it will take a very deft touch on the monetary helm.  The odds of oversteering or understeering are very high, so I'm anticipating a more cyclical economy in the coming years than we've had in the past few years.

Qualification on the credit crunch:  When I say that the credit crunch will soon be over, I mean that profitable businesses and prudent consumers will be able to get credit.  I don't mean that credit spreads will be as narrow as historical averages, nor do I mean that much real estate development credit will be granted, nor that any sub-prime borrowers will get loans.