Tea Leaf: Spring has sprung with economic uncertainty

Published: Tuesday, March 15 2011 5:00 p.m. MDT

Just wondering: how does one attempt an economic and financial forecast in the wake of major uncertainties?

How will the three-legged catastrophe of a 9.0 earthquake, destructive tsunamis and potential nuclear meltdown in Japan impact the global economy? Will the plunge in Japanese stock prices of recent days continue to lead U.S. and global stocks lower?

How will political and social upheaval (including the deaths of thousands of Libyan citizens valiantly seeking freedom) in northern Africa and the Middle East — now relegated to page two in the global media — ultimately impact the global economy? Will such developments spread further across the region? Will oil supplies be disrupted more than is the case so far? When all is said and done, will oil prices be higher, or lower?

How will financial developments across southern Europe ultimately play out? Will Greece, Ireland, Spain and Portugal restructure their massive sovereign (national) debt levels? How many additional billions of euros will the Germans and the French have to provide in order to achieve greater euro-zone financial stability?

How will the major developments above impact U.S. corporate and consumer confidence? Will each back off from more recent levels of stronger investment and spending? Will recent declines in long-term interest rates continue, helping to stimulate housing purchases and refinance activity?

How will volatile U.S. gasoline prices ultimately play out? Will the combination of factors above lead us to $4 or $5 per gallon, or back to $2.75?

Will many poll-watching members of the U.S. Congress ever get serious about long-term budget deficit containment? Will they soon recognize that the spending and deficit crisis in this country is our potential earthquake, our financial tsunami? Must another financial crisis occur to finally get their attention regarding the unavoidable need to slow the future growth rate of entitlement spending?

Forecasting the future is never for the faint-hearted. Most forecasting economists (including me) hope prior forecasts are rarely revisited.

Given the nearly unprecedented list of uncertainties above, here is our view of where we are — and where we may be headed.

The American economy

By month-end, U.S. economic growth will have been positive for seven consecutive quarters. Such growth, which stalled a bit during mid-2010, is likely to continue at a moderate pace this year and next. The vibrancy of such growth will be determined by the laundry list above.

Many forecasters, who boosted growth expectations for this year and next following the November elections and the December extension of the 2001 and 2003 tax cuts for all Americans, are now trimming those forecasts slightly because of the issues noted above, especially prospects for higher energy prices and lower confidence levels. Economic growth around a 3 percent to 3.5 percent real (after inflation) annual rate this year and next remains our best guess.

American government

The U.S. Congress, in cahoots with the administration, is currently borrowing 40 cents of every dollar it spends. That spending, estimated at $3,800,000,000,000 this fiscal year, has doubled during the past 10 years. The estimated budget deficit this year of $1.6 trillion is simply mind-boggling at more than $180,000,000 every 60 minutes … and is financial cancer.

American employment

The surprising and welcome plunge in the nation's unemployment rate between November 2010 (9.8 percent) and February 2011 (8.9 percent) is unlikely to continue. Unemployment is likely to average perhaps 8.7 percent to 9.2 percent over the balance of the year, with a slightly lower average in 2012.

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