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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 16, 2009 at 10:13 AM

The second-half outlook: No recovery until 2010 and risks galore

Top of the News: As the U.S. endures the 20th month of the worst recession — or outright contraction — since the Great Depression, the view from halfway through 2009 is mixed at best.

Nouriel Roubini’s team at RGE Monitor, one of the best in the business, recently completed its second-half forecast. The worst of the crisis has been averted by aggressive policy from the other Washington. But negative GDP growth will continue through 2009, and a “rebound” in 2010 will be at a sluggish rate, well below potential.”

The economists do “not yet see signs of a strong and sustainable recovery.” Other highlights:

+ Job conditions are “quite dire.” More than 6.5 million jobs have been lost since the beginning of the recession. Context: losses in 2001 totaled 2.5 million; 3 million in the early 1980s; 2.2 million in the ’73 downturn. Average weekly hours continue to fall, as do job openings and turnover.

+ Don’t look for a consumer-driven rebound, even though consumer spending accounts for 70 percent of the economy. Consumers are drowning in debt, no longer have home equity loans to tap for goodies from China and are scrambling to save. The result: a painful “rebalancing” of the global economy that had been expanding thanks for Americans’ willingness to spend (charge).

+ Housing seems to have stabilized but not at a “pace that can guarantee that the lingering inventory overhang will dissipate.” The result: House prices will continue to fall. I would take this a step further. First, other shoes may fall in the housing situation as layoffs and foreclosures create a self-reinforcing cycle and other mortgages go bad. Second, in many parts of the country sprawl building on a massive scale, based on leverage and cheap gas, was the the economy. It’s not coming back, and we don’t have our heads wrapped around this new reality yet.

+ Late next year or 2011 could see a double-dip recession if oil prices rebound too fast in anticipation of recovery, or if inflation replaces the fear of deflation as the macro sum of all fears.

Obviously Seattle the the Puget Sound region won’t be immune from these forces. We’re fortunate to have avoided the worst housing excesses, but face the danger of more aerospace job losses and perhaps more headquarters going down. A jobless recovery and clogged venture capital are other likely scenarios that will beat us about the ears. Then there’s the issue of how global trade resets and its effects on America’s trade dependent state. Yet this is a place full of innovation and quietly growing small companies. If they can capitalize on the big reset, that could be, as The Donald says, h-u-g-e.

The Back Story: Not all is gloomy, however. Writing in the McKinsey Quarterly, Professor Amar Bhidé argues that while the United States faces formidable competition from China and India for R&D, it doesn’t mean America will be a net loser.

“Thomas Friedman to the contrary, the world is hardly flat: China and India aren’t close to catching up with the United States in the ability to develop and use technological innovations,” he writes. Provocative reading (registration is required).

Today’s Econ Haiku:

I hate that Starbucks!

Give me my neighborhood shop.

Ooops, it’s Starbucks, too.

Comments | More in Jobs/Unemployment, Macro/Big picture, Outlook


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