Speaking of Future Expectations…

July 19th, 2011 at 8:52 am

For what it’s worth, here’s one forecast from 2011q2 to 2013q1, by the estimable Mark Zandi and the Moody’s Economy.com team.  Like most forecasts right now, it shows slow improvements in GDP, jobs, and unemployment, though the latter glides down slowly to about 8% at the end of the forecast.

Source: Moody’s Economy.com, Mark Zandi

Zandi writes:

“While hard to see in the current gloom, the economy’s fundamentals are improving. Corporate profitability and balance sheets are very strong: The question is not whether businesses can increase investment and hiring, but their willingness to do so. Household debt burdens are easing and credit quality is rapidly improving; delinquency rates among loans other than first mortgages are back to prerecession levels. The financial system has also been recapitalized and is generating significant profits again.”

Most forecasts expect this type of pattern because once the “corrections” (e.g., high debt levels) or headwinds (e.g., high gas prices) dissipate, the models assume the natural growth cycle takes over.  Investors respond to low interest rates, there’s more economic activity (consuming, building, investing), job growth picks up, and you’re off and running into an expansion.

And, in fact, this forecast has employers generating around 300,000 jobs per month by 2013, a decent pace that would put faster downward pressure on the jobless rate, so that’s the number to watch.

The problem is that so far, the expansion has been jammed by all the factors mentioned here.  I don’t mean to be gloomy, and I hope Mark and co. are right (and even their forecast is for only moderate growth—more of an upward-leaning L than a V-shaped recovery).  But it’s just as likely that we’ll have to move these three lines forward in time, i.e., we stay stuck in neutral for a few more quarters before these growth patterns kick in.

More to come on this.


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6 comments in reply to "Speaking of Future Expectations…"

  1. Tyler says:

    This is scary for President Obama’s reelection prospects. He absolutely needs to get unemployment under 8 percent or the Republicans will be able to say, “Are you better off than you were four years ago?” We all know how extraordinarily well that worked for Ronald Reagan.

    • pjr says:

      Tyler these goalposts keep moving. In fact there is no magical unemployment number to get reelected. A year or so ago, pundits said he needs to get it below 8.5 percent. If he got it to 8, they’d say 7.5. What probably matters is that it is not getting worse, and getting better, during 2012.

  2. Fred Donaldson says:

    Do you regard Moody’s as a source of economic growth projections, considering their track record with valuation of financial instruments that were later deemed worthless?

    Unemployment of 8% is no blessed future, and optimistic if not venal, when companies like Cisco have 90% of their manufacturing out of the country, and are still announcing huge job cuts here.

    • Tyler says:

      I agree that an unemployment rate of 8 percent is no blessed future, which is why I said “under 8 percent”.

      If President Obama does not get unemployment under 8 percent before election day, the Republicans can repeatedly point out that the unemployment rate is worse than when President Obama took office.

  3. Westie says:

    Why does anyone quote Mark Zandi, the guy is so wrong so often he’s become a punchline. See this list of Zandi’s brilliantly consistent errors: http://www.ritholtz.com/blog/2010/09/zandi/