The Current NABE Forecast
Uncertainty related to the current and future strength of the economy following the deepest recession since the Great Depression results in people looking to experts for forecasts. The Great Recession is technically over, but uncertainty prevails. The National Association for Business Economics (NABE) is an excellent source of economic forecasts. The November 2009 NABE Outlook (see: http://www.nabe.com/) indicated an improved outlook for 2010, and that companies should start adding jobs soon. NABE also indicated continued slow growth in household spending, but business investment and corporate profits are more positive indicators. The dollar will weaken marginally, and housing starts will improve significantly but remain well below long-term trends associated with normal economic conditions. The consensus is that inflation rate will remain low due to the relatively weak economy as illustrated by the expectation that the unemployment rate will remain high by historical standards, and the Federal Reserve is not expected to start tightening until next spring. The forecast represents the consensus of macroeconomic forecasts that have been prepared by a panel of 48 professional forecasters.
Real GDP declined at an annual rate of 1.9% during 2008. Then there was a severe decline in real GDP at an annual rate in excess of 5.0% during the first quarter of 2009. This is the worst result for the economy in fifty years. Overall, it is expected that real GDP will decline 0.2% in 2009, and then show improved economic growth equal to 3.2% in 2010. This reflects relatively weak increases consumer spending. As indicated above, improvements in business investment, especially in inventories and to a lesser extent in equipment and software, are expected. The very weak housing market and the significant decline in wealth due to declining home values are the primary reasons for continued weakness in personal consumption expenditures. The consumer price index is expected to decline 0.3% in 2009 due to weakness in the economy and the labor market, but this deflation should not continue into 2010 as it is expected the inflation rate will equal 1.8% in 2010. Improved stability in the credit markets and the very robust rally in the stock market are positive indicators. Significantly below trend levels of housing starts and home prices will occur in 2009. Only 580,000 housing starts are expected in 2009, and only 790,000 are expected for 2010. The majority of analysts believe the housing market has bottomed, but a slow recovery is expected.
The absence of inflationary pressures allows the Federal Reserve to pursue very aggressive monetary policies. The consensus of the economists who were surveyed by NABE is that the Federal Reserve will leave the federal funds rate target this year at nearly 0.0%, but that it will raise it to the still very low rate of 1.00% by the end of 2010. The expectation is also that long-term interest rates will also remain relatively low. The yield on the 10-year Treasury note is expected to equal 3.50% at the end of 2009 and increase to 4.15% by year-end 2010 reflecting the expected improvement in the economy. These relatively low long-term interest rates, party the result of aggressive monetary policies, will contribute to low mortgage rates.
The strength of the dollar is important to those who are interested in traveling and those who import and export goods and services. The dollar strengthened when the financial markets crisis deepened during the second half of 2008 as global economic weakness led investors to purchase dollar denominated assets to try to hedge against risk. One Euro bought 1.58 dollars in July 2008, but bought only 1.32 dollars in January 2009. Since then, improvements in the stability of the global economy led to a resumption of weakness in the dollar. The economists expect the dollar to continue to be relatively weak in 2009 and 2010. One Euro is expected to be able to buy 1.48 dollars in 2009 and 1.47 dollars in 2010. Reflecting the expectation that the economy will start to strengthen later in 2009, the S&P 500 Index is expected to end 2009 at 1095 and end 2010 at 1199.
There are other very good resources on the internet for forecasts related to the economy and specific economic indicators. Among the good resources include websites for the Congressional Budget Office (http://www.cbo.gov/), The Federal Reserve Bank of Philadelphia’s Livingston Survey (http://www.philadelphiafed.org/research-and-data/real-time-center/livingston-survey/), Mortgage Bankers Association (http://www.mbaa.org/), National Association Home Builders (http://www.nahb.org/), and Freddie Mac (http://www.freddiemac.com/).