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.

Employment gains in coming months may be muted somewhat by the uncertainties now impacting businesses. Still, gains averaging 150,000-200,000 net new jobs monthly seem doable.

American inflation

The Federal Reserve's intention to create a bit of inflation has borne fruit. In fact, the harvest may be more than the Fed bargained for.

Higher commodity prices of all stripes and rising energy prices tied to the issues above will see inflation reach and likely exceed the 1.5 percent to 2 percent annual goal of the Fed. More and more companies have been able to boost prices, while more and more consumers face stretched budgets.

The Federal Reserve

The Federal Reserve's Open Market Committee's latest official view of the economy was released Tuesday, noting, "The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually." The FOMC statement also noted that the Fed "will pay close attention to the evolution of inflation and inflation expectations."

Financial market players see the Fed concluding its $600 billion purchase of U.S. Government securities, affectionately known as QE2, in June. Given the Fed's more optimistic assessment of the economy today than in prior months, most financial market players would NOT like to see the announcement of QE3, noting the high level of monetary stimulus already in the financial system.

The Fed's critical federal funds rate has been at an historic low target range of 0.00 percent to 0.25 percent for the past 27 months. It could easily stay at that level for another year.


One of the most anticipated and long-delayed developments within the U.S. economy has been stability in home prices. For what it's worth, most economists see U.S. home prices stabilizing this year, with modest gains during each of the next few years. As usual, some markets will perform better than others.

Stability and modest home-price appreciation will be most welcome following painful downward moves between 2006 and 2010. Conventional mortgage rates still starting with a "4" will benefit those willing (and able) to refinance a home or finance a new or foreclosed property.

The global economy

Reasonably solid global growth is likely to continue, with stronger or weaker performance a function of the items above. China and India are growing at a rapid pace, with both addressing uncomfortable inflation. Northern Europe is growing, while southern Europe deals with austerity. South America is growing, led by Brazil. Mexico struggles with cartel violence, while Canadian growth is reasonable.

Uncertainties … unknowns … waiting for whatever is next.

Jeff Thredgold is chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.