Economic forecasts should be viewed with a bit of healthy skepticism.
That’s the view of Stephen Barrows, associate professor of economics at the U.S. Air Force Academy, who along with Fred Crowley, professor of economics at the University of Colorado at Colorado Springs, were keynote speakers at a Middle Market Entrepreneurs economic forum at The Antlers Hotel.
As an example of how economies and markets can fluctuate, despite the best predictions of economists, Barrows cited the Federal Reserve’s unemployment forecasts during January, 8.5 to 8.8 percent, which were “significantly revised” during later months. Actual unemployment hit a peak of 10.2 during October.
Barrows quoted international economists Carmen Reinhart and Kenneth Rogoff, authors of “This time is different: Eight Centuries of Financial Folly,” as saying that economic recessions which are driven by financial crises show a 36 percent decline in real housing prices for a three- to five-year period.
And such recessions are longer and more severe, and recoveries are slower and more anemic — which holds true across countries.
“If (the U.S.) follows this historical pattern,” Barrows said, “housing prices will decline through 2011 and 2012, and unemployment will stay high through 2012.”
And during the three years following a financial-crisis recession, a country’s national debt increases by 86 percent.
“When the economy begins to gain traction, inflation is a near certainty,” he said.
But the risk of inflation is low until banks begin lending their excess capital again and liquidity resumes. During the 1980s, the Federal Reserve contracted the money supply by raising interest rates to control inflation — and caused a double-dip recession.
“They’ll probably have political pressure not to raise interest rates (this time),” Barrows said.
Unemployment will remain relatively high, consumer spending will remain sluggish and “we won’t see a dramatic recovery in gross domestic product in the next several years. The recovery will be ‘L’ or ‘U’ shaped — not ‘V’ shaped. Free-market economies are remarkably resilient, but I’m skeptical that ‘this time is different.’”
Unemployment dropped from 10.2 percent during October to 10 percent during November.
“It looks like it’s improving,” Crowley said, “but many discouraged workers have withdrawn from the labor market — if they were counted, it would be 15 to 20 percent.”
But retail sales numbers have “popped up recently” — Black Friday notwithstanding.
“And Cash for Clunkers did affect retail sales,” Crowley said, “but if you adjust for all those programs, there’s still an increase in retail sales.”
Meanwhile, “there is $1 trillion sitting in vaults, waiting to be used. When banks start lending this money, what will happen? Retail activity will increase. In the short run — which is a mythical concept, I’m not quite sure how long it is, but — we cannot increase goods and services,” Crowley said.
It takes time to manufacture cars and other products, and business owners are still “gun shy” and will neither increase inventory nor hire people quickly.
Aggregate demand has an impact on price, and the velocity of ramp-up will be slow during the recovery. Therefore, inflation is a “big concern.”
The manufacturing sector is the largest generator of secondary jobs, but the United States has “exported manufacturing — we don’t make things anymore. The U.S. will not grow jobs aggressively until we move back to a manufacturing base,” Crowley said.
And defaults are not finished, yet — 9.5 percent of all residential mortgages are 90 or more days late, but these are only several hundred thousand dollars each. Commercial loans can be in the millions per loan, and 8.5 percent to 9 percent of commercial loans are 90 or more days late.
“I wouldn’t be surprised if, in a couple of months, the first quarter of 2010, commercial defaults surpass residential loan defaults as a percentage,” Crowley said.
If this all sounds rather gloom-and-doomish and fear- and anxiety-ridden, well, in reality, Crowley and Barrows had the audience laughing all during the forum. After all, this is Colorado. If the single-digit temperatures all week couldn’t hurt us — nothing can.
But if you’re valiantly attempting to glean a bit of positive news in this column, here it is. Nationally, housing prices declined 8.5 percent, but in Colorado Springs, prices are down only 4.5 percent compared to their peak.
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.