“High unemployment will continue to restrain consumer activity throughout the G7 [countries, which includes Canada, France, Germany, Italy, Japan, United Kingdom, and United States] resulting in further uneven economic data overall. Throw in residential housing market weakness, commercial real estate fears, [plus] financial sector travails, and a smooth trajectory toward sustained growth seems highly unlikely.” –Brian Dolan, chief currency strategist, FOREX.com, a division of GAIN Capital Group
It would be nice to report that economists are predicting bountiful times in 2010, but of course, that’s not the case. Trucking in particular must gird itself for yet more grim economic times as we get the New Year off to a rather gloomy start.
That’s not to say the economic news is ALL bad, mind you – but as most truckers I know are confirmed realists, it’s important to know where the forecasted headwinds are coming from so plans can be made to deal with them.
Brian Dolan, chief currency strategist for FOREX.com, a division of GAIN Capital Group, doesn’t have a whole lot of good cheer to share in his economic outlook for 2010.
“We think the risk of a double‐dip in economic activity is high of enough that it should not be ignored or tossed aside,” he noted in FOREX’s outlook for the first half of 2010, issued just before Christmas.
“First, it does not look as if the U.S. fiscal stimulus in the pipeline will be enough to generate significant growth,” he added. “Second, there looks to be little doubt that this will be the mother of all jobless recoveries. Finally, a relapse in what is seemingly an improving U.S. housing market would nip the nascent global recovery in the bud.”
Dolan believes the much heralded “stimulus package” passed by Congress in February last year is going to come up short in terms of helping the U.S. economy.
“Most of the U.S. government’s $790 billion stimulus package will have been spoken for as we enter 2010,” he explained. “There is currently $280 billion in spending that has yet to be allocated and about $128 billion in tax cuts that have yet to be distributed. Most of the spending portion is at risk of being absorbed by troubled state budgets, while the majority of the tax incentives are unlikely to be put back into the economy any time soon.”
State budget deficits are hindering the stimulus impact, he added. According to the National Conference of State Legislatures, the projected budget gap for states in FY2010 is about $145 billion. Should most of the remaining stimulus monies be needed to plug these gaps (as was the case in 2009), the overall impact to economic growth will be significantly diminished.
“Siphoning $145 billion to the states for budget purposes would put the impact to U.S. gross domestic product from the remaining amount of stimulus at around 1%,” he said. “This is assuming that we get a one-for-one impact on every dollar spent -- which is debatable -- and that state budgets do not deteriorate further -- which is obviously a risk.”
In terms of the remaining tax cuts, permanent income hypothesis and recent observed trends suggest little of this will be put back into the economy, noted Dolan. “Permanent income hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer‐term income expectations," he explained. "This theory has been proven true once again very recently.”
He pointed out that U.S. government transfers were increased markedly in early 2009, averaging a whopping 3.2% monthly increase from January through May. During this time, though, personal consumption increased a paltry 0.2% per month on average. “In other words, a $322 billion increase (annual rate) in handouts only managed to elicit a measly $80 billion in spending,” said Dolan. “A similar spending pattern for the remaining $128 billion in tax cuts would see about $32 billion put back into the economy, or a measly 0.2% of gross domestic product.”
Dolan also noted that all the recent growth in the U.S. has been government induced. “If not for cash for clunkers and the first‐time homebuyer tax credit, growth in the third quarter would have been just about non‐existent compared to the actual near‐3% results,” he explained. “Little in the way of growth contribution from remaining stimulus coupled with what is likely to be negligible organic growth should bring a very weak U.S. economy as we kick off 2010.”
[Not exactly wonderful news to hear, since all the record spending by the Obama administration has push the U.S. deficit up past $14 TRILLION -- and red ink just keeps growing …]
Dolan also thinks the recent decline in the U.S. unemployment rate is something of a mirage – “very inconsistent in terms of what all of the other employment data for the month of November,” he added – so as a result he expects unemployment to remain in double digits for the foreseeable future, potentially peaking as high as 11% in the first half of 2010.
“The National Federation of Independent Businesses released a small business confidence survey and the component that shows hiring intentions dipped to negative three in November from negative one in October last year,” he said. “The lack of follow‐through in terms of future hiring suggests little in the way of momentum for the currently beleaguered jobs market – so while firms are likely done with most of their firing, the hiring looks unlikely to return anytime soon.”
Such negative headlines, Dolan suggested, should continue to weigh on a consumer confidence metric which continues to plumb the depths. “The consumer’s outlook on the economy has remained broadly unchanged since June and at 68.5 remains considerably below the average of 92.5 seen since 1975,” he noted.
This metric leads real consumer spending, he stressed, which suggests that personal consumption will go no higher than 1% to 1.5% near‐term – and such consumer spending accounts for about 70% of U.S. gross domestic product (GDP), so such modest growth here‐in will make it very difficult for the economy as a whole to grow at potential.
“The historical statistical relationship between GDP and employment suggests we need to see real annual growth of 3.0% in order to bring down the unemployment rate by 1% point,” Dolan said. “Paltry consumer spending coupled with government stimulus that is likely to contribute a mere 1% to annual growth suggests reaching that 3% benchmark will be a daunting task.”
Calling this outlook "daunting" my be an understatement, but one thing is for certain -- truckers have suffered through far worse to this point, so even a modest improvement in the world's economic fortunes would prove a welcome boon.