Investors and the 2009 Economic Outlook

Posted by: Ben Steverman on December 11, 2008

Bullish investors are focused on the middle of 2009, with many strategists and economists thinking the economy will start bouncing back by then.

If that’s the scenario you’re betting on, however, this dispatch from the Atlantic’s Marc Ambinder ought to be troubling:

It’s quite unsettling to talk to members of Barack Obama’s transition teams these days, especially those who are helping with the economics portfolio. Without going into details, the sense I get from them is that they are very worried that the economy will get a lot worse before it gets better. Not just worse… a lot worse. As in — double digit unemployment without the wiggle factors. Huge declines in aggregate demand. Significant, persistent deficits. That’s one reason why the Obama administration seems to be open to listening to every economist with an idea and is stocking the staff with the leading lights of the field.

It’s in the political interests of the Obama economic team to lower expectations. Dire predictions help win support for aggressive policy responses. But the last year has shown that dire predictions can come true.

BusinessWeek’s Peter Coy talked to a lot of economists about their 2009 outlooks and he got a much more mixed picture in this week’s cover story.*

But, as I think Coy’s piece makes clear (and you really should go read it if you’re wondering where the economy is headed), the chances of a very bad 2009, particularly in the U.S. job market, aren’t exactly remote. Coy writes:

“We’ve got so far to climb out of this [financial] hole that if we start today, then on any reasonable time path we might still be climbing out a year from now,” says Robert V. DiClemente, chief U.S. economist of Citigroup (C) in New York. Predicts the AFL-CIO’s chief economist, Ron Blackwell: “Things will get worse, perhaps much worse, before they get better.” That said, this job bust won’t last forever. There are forces at play that will eventually pull the economy out of its free fall. The key is smart government policy that sets politics aside. It must provide a combination of short-term consumer stimulus and long-term investments without stepping over the line into wasteful and innovation-stifling industrial policy.

There are reasons to be optimistic — Obama’s stimulus plan might work, the Federal Reserve’s efforts to stabilize the financial situation could finally pay off — but there’s a lot that could go wrong.

That’s why I’m a bit surprised by the optimism I’m seeing in notes published by investment advisors and stock strategists. The idea that the economy will start to recover in the middle of 2009 has really taken hold.

Bruce Bittles, chief investment strategist at R.W. Baird, writes:

The combination of falling home values and a drop in mortgage rates will dramatically improve housing affordability and along with plunging energy prices improve consumer discretionary income. This is the first step in the recovery process that is expected [to] stabilize the economy by mid-2009.

Standard & Poor’s Global Investment Policy Committee note from Dec. 3:

Despite ongoing weak global news flow, given that equity performance tends to lead an upturn in the fundamentals by roughly six months, global stock markets have rebounded on hopes the worldwide economic and profit outlook will begin to stabilize by the [second half] of 2009. Time will tell.

Throughout this crisis (and I’m thinking all the way back to late July 2007), optimists have continually insisted that an improvement is about half-a-year down the road. Eventually, hopefully soon, they will be right.

*Coy notes in his piece that economists at “the epicenter of the financial crisis” — i.e. those working on Wall Street or in big investment houses — seem to be much more pessimistic than those elsewhere. If so, it also makes sense that the Treasury Secretary-designate Tim Geithner (and his crew) would be on the gloomy side, given his experience in the trenches as president of the New York Federal Reserve Bank.

Reader Comments

TrueReality

December 18, 2008 10:41 AM

Anyone that thinks the economy is going to turn around by mid 2009 is an IDIOT, especially with more & more jobs being lost. If people don't have jobs, they can't pay bills (i.e. mortgage) or spend money. Therefore, retail is going to be the next industry to take a major hit (dept stores/malls beware). More jobs losses = more foreclosures = more bank / credit issues = more real estate issues = more economic problems. And let's not forget the auto industry. My advice, Buckle down, hold on to as much as you can and PRAY!

Ripple

February 5, 2009 5:23 AM

I really do not understand how the economy will rebound in just 6 months!! These guys are crazy, daydreaming...Low mortgage rate will make housing more affordable, but who has the job to have money? Who has the money to buy? Where is a bank to lend money? Housing is a just small segment of the economy. When US economy is shrunk by more than 70% (stock ex valuation), when the loss is in trillions, how such small stimulus package will revive the economy? More so most of the money is spent by those banks and financial institutes without a plan!!!! Merely printing money without real production will make the things worse as the Government will have to pay the price for the stimulus package. These financial institutes and big name analysts are trying to fool us only.

Bernardo V. Aguilar

July 18, 2009 12:33 PM

My two (2) cents; and no you can’t keep them:
The government is wrong at just throwing the money out to the auto, insurance, banks and anything else it things will save our economy. The US has tried to subsidize low income families for years, food stamps programs, child care programs, but this has not shown the people that use them anything else other than how to fill out the papers to be able to re-qualify for additional hand outs.

You want to help these people force them to some type of work schedule and government school; they don’t go they don’t get there money.

The US needs a new industry that can not be out sourced to a third world country, focus on resources that we have at hand. A plan needs to be put in place similar to the space race; but the idea is that we need a new industry that will create US jobs and not hand everyone money. The money will run out, what than. Do we continue to keep our head in the sand saying that it going to get better just because the government gave someone a blank check with no chance of recovering that loan?

Yes many will have to adjust there standard of living and yes everyone will have to adjust based on what they will be able to earn; but if this is not done our children’s children will not have much of a life. The US is being challenged, I am not saying US as United States I am saying US as the people, the same children that were raised by their parents on what they could earn, and save from the 60 or 70 hours a week that they worked. They didn’t have A/C or TV’s we can adjust.

1.) Establish a plan for achieving a goal.
2.) Enact the plan
3.) Measure and analyze the results
4.) Implement necessary reform when things are not as expected.

Bernardo V. Aguilar

July 18, 2009 12:33 PM

My two (2) cents; and no you can’t keep them:
The government is wrong at just throwing the money out to the auto, insurance, banks and anything else it things will save our economy. The US has tried to subsidize low income families for years, food stamps programs, child care programs, but this has not shown the people that use them anything else other than how to fill out the papers to be able to re-qualify for additional hand outs.

You want to help these people force them to some type of work schedule and government school; they don’t go they don’t get there money.

The US needs a new industry that can not be out sourced to a third world country, focus on resources that we have at hand. A plan needs to be put in place similar to the space race; but the idea is that we need a new industry that will create US jobs and not hand everyone money. The money will run out, what than. Do we continue to keep our head in the sand saying that it going to get better just because the government gave someone a blank check with no chance of recovering that loan?

Yes many will have to adjust there standard of living and yes everyone will have to adjust based on what they will be able to earn; but if this is not done our children’s children will not have much of a life. The US is being challenged, I am not saying US as United States I am saying US as the people, the same children that were raised by their parents on what they could earn, and save from the 60 or 70 hours a week that they worked. They didn’t have A/C or TV’s we can adjust.

1.) Establish a plan for achieving a goal.
2.) Enact the plan
3.) Measure and analyze the results
4.) Implement necessary reform when things are not as expected.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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