American economy: 2nd half 2009 to 2Q 2010
Written by Michael Vass
Once again I am looking forward in time at what I expect to see happen to the American economy in 2009 and the first half of 2010. In past years such reflections have always wound up being 62% or more correct. Something I am of course happy to say, though considering the downturns that I have correctly anticipated I did prefer to be wrong.
Still we all look forward. And this is what I expect.
It is a given that the Obama Administration currently states that the unemployment levels will reach 10% in this current year. Debate rages on the potential of unemployment going even higher in 2010, and the exact number of people unemployed that do not count into the Government unemployment figure (people no longer count as unemployed after several weeks – even if they remain without work).
My expectation is that we will see unemployment hit 11.5% by the second half of 2010. Which by my estimate would mean that some 18% of the nation would be unemployed in total. This obviously bodes very badly for consumer goods companies. As well as the banking sector. Likely the rate of new business growth will be negative and existing small businesses will close at an exponential rate.
Thus 4th quarter sales in 2009 will be very bad. I expect to see no growth and relatively strong losses over the season. I would not be surprised to see the quarterly figures down to -1.5%, and that retailers will be slashing prices 40% just to clear out inventory. The start of the 1st quarter of 2010 will have some of the largest increases in unemployment ever, with the exception of the Great Depression maybe.
This ties directly into the mortgage foreclosure rate and new home sales. I expect the worst here. Already there have been 75 banks that have failed in 2009 so far. The largest of the year has been Colonial BancGroup, directly tied to mortgages. But I believe that by the end of the year we could see a total of 125 banks closed and an even larger financial institution collapse.
I expect that this will bolster another round of pressure on the housing industry. Home prices will likely fall another 3 – 5% on average. And it will reinforce the sluggish sales going into the 4th quarter.
A factor that has not been spoken about much at this point will be energy costs. Not considering the effect of Cap & Trade, crude oil has been on the move ahead of the cyclical trend in pricing. Currently prices are around $70 a barrel. I believe that this winter will be colder in the northeast (so much for global warming) and with all the other factors involved we could see the price of crude oil rise to $90 by the 1st quarter 2010.
Moving hand in hand will be the price of gold and other commodities. Fueled by the increase in mortgage failures, the increase in bank collapses, and the unemployment increases, there will be a rush to security with Gold being the thing to have. I can imagine seeing gold spot prices reaching $1100 early in the 1st quarter and stabilizing there.
Very likely, due to these circumstances, the dollar will weaken especially from the spending spree in Congress and the White House. IF Cap & Trade, Health Care Reform, and several other promised changes are enacted as proposed the national debt will increase quickly with projections exceeding $11 trillion dollars in 10 years. Which will make American debt nearly worthless to purchase by nations like India and China. The only reasonable means to encourage their continued support will be to increase the Bond rates, sparking inflation.
Higher costs of energy means increased costs to employers. Which will be passed to consumers, who will already be burdened by the prospect of losing jobs. The other alternative will be to fire more workers. Again adding to the pressure on 4th quarter sales and mortgage foreclosures.
Increased transportation costs, the proposed increase in taxes for the Health Care Reform Bill (which I expect to be shoved thru Congress under Democrat only support and with minor changes), and the pending repeal of the Bush tax cuts will all create inflation. This will likely be hidden as it has been to date – via smaller portions of food and goods, coupled with slightly higher cost, plus an exodus of companies to foreign soil where workers are cheaper to employ.
I expect that oil companies will again be the target of Windfall taxes, while domestic offshore oil and natural gas drilling will be killed as an option. Renewable energy options will be touted as answers, and more money will be dumped into Wind Energy and Corn-based Ethanol. Neither is viable or anywhere near realistic, but will contribute to the inflationary increases that should start to catch attention in February 2010.
I expect that the stock market will react to all these factors in late September – amplifying the normal October sell off. I believe that another downturn will take hold of the market in January until April as year end earnings will be flat compared to estimates in most industries especially retail sales. Mining, Gold, Coal, and other commodity dominated stocks should prosper though. If I am correct then we could see a low in the market of somewhere around 8200 – 7900 by November 2009 and again in March 2010.
Expect a growing call for a second Obama stimulus to start around November at the latest. I would expect this to take the form of a check, much like the Bush stimulus, in the range of $200 billion. I would believe that this will pass in March of 2010, and distributed to the public by September – in time for the 2010 mid-term elections.
Like in any look forward there are many factors that cannot be foretold. Many of these factors are outside of the influence of the nation, many are reactions to events that have nothing to do with us. Thus the following can have an effect on what I have stated above:
Iran (especially their nuclear program)
North Korea (especially firing more missiles)
Afghanistan war (especially American losses)
Iraq (growth of insurgents and internal strife)
Pakistan (especially if America strikes targets in their nation and/or collateral damage to civilians)
African regional conflicts escalate (notably Darfur and others)
Israel (especially if they take pro-active steps against Iran or others)
Gold and/or Crude Oil production
Increases in Piracy
Terrorist attack against Americans
The abovementioned list is not complete, but does equate some of the larger issues facing the nation. I have listed them in order of potential threat and action. But there is no limit to things that might happen, say with China curtailing Rights or Russia becoming more aggressive as it did last year.
Factors that could adversely affect my projections with domestic influences include:
Health Care Reform (passed in a very different form, or completely shut down)
A 2nd Stimulus
Cap & Trade
The end of media support to President Obama
Accelerated job losses and unemployment
The collapse of a major financial institution (I still don’t like CitiGroup)
Public questions about czars and their power (ie. pay, automotive, ect.)
Additional new programs like Cash 4 Clunkers
A national disaster
Increased racial tensions
A new Government plan for mortgage foreclosures
Use of repaid TARP funds
The unused Stimulus money
Renewed questions about illegal aliens (or undocumented workers if you really prefer)
One of the biggest factors that will affect 2010 is the mid-term elections. The Democrat majority will be seeking every means of maintaining their powerbase. This means that several controversial issues, if not addressed and passed by the end of 2009, will not be touched in 2010. It also means that several options that will bolster the image of Democrats will be pushed forward as we approach May 2010 (ie 2nd Stimulus).
Overall I expect that the Obama Stimulus will continue to be a failure, though as we reach June 2010 there will be some improvement in unemployment numbers and will be claimed as due to the Stimulus. This is a false assumption as it appears the recession is following a natural path, if not slightly impeded by the Stimulus.
The stock market will enter a stable period after the 1st quarter drop. It will slowly rise back to current or higher levels by mid-summer 2010 based on improving unemployment numbers. Several companies will beat estimates strongly, and the foreclosure rate will drop by 2%. Housing prices will stabilize. I think that oil prices will hold at the $85 a barrel level into the summer. But the recession will not end until April 2010 – though politicians will proclaim its demise by November 2009.
Inflation will give way to an early trend of hyper-inflation. Credit card debt will again start to be a talked about concern. Car loans will remain sluggish, waiting for another Government program that will arrive before the mid-term election.
There are many factors that can effect the economy. No one person can ever anticipate them all. Likely only a portion of the things I have projected will happen. Still having an objective view is essential to creating plans for various outcomes.
Always discuss changes to your investments with a qualified investment advisor. Check events and information for yourself. And have a plan.
