by Edward Harrison
Some signs are looking up, but there are still plenty of landmines in the economy.It’s high time I laid my cards on the table about 2011. So, here it is: I am cautiously optimistic about the US and global economy for 2011. Let me explain both pieces of the puzzle — the cautious part and the optimistic part — below. I’ll start with the positive first.
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What are US jobless claims telling us about recovery? They are averaging about 410,000, down from almost 470,000 a year ago. And since employment is a lagging indicator, we should expect claims to drop even further as GDP has been growing.
Across the board, the economic indicators show a modest but improving economic picture: industrial production, capacity utilization, personal income, retail sales. And I expect this to continue through at least the first half of 2011, probably through the whole year.
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That said, policy makers have done a pretty good job of avoiding egregious policy errors so far. I think that gives us enough oomph to get over the hump so the cyclical agents like inventories and cyclical hiring can do their magic. But, here are my lingering concerns.
- Europe: the sovereign debt crisis refuses to go away...
- US states and municipalities: Meredith Whitney has put this crisis front and center. My take is similar to the one on Europe: The question is whether this — in and of itself — deals a fatal blow to recovery in the US, infecting the global economy. Here, I have always felt that the budget issues would only become dire in a cyclical downturn as declining asset prices created public sector pension losses. In an upturn, tax revenue increases, as do accounting gains from asset prices. Costs for supporting the unemployed decrease. To the degree that there are budget problems, the situation is very pro-cyclical — meaning you have what MBAs call a high degree of operating leverage on municipal and state income statements. Leverage works to magnify cyclical ups and downs. That means that, while I agree with Whitney’s alarm on munis, I do not think this is a 2011 event.
- Housing: House price declines have resumed in the UK and the US. They never stopped in Ireland and Spain. The housing double dip is in progress. Complicating matters, clearly, fraud was a big issue not only in the origination of mortgage loans in the US but also in packaging and foreclosure. There is a real possibility that a systemic legal problem develops on that front in 2011. I don’t know how this problem will be resolved. At this point, I see it as the biggest near-term risk for the US in 2011.
- Currency Wars: a lot of good is done simply by having economic growth...
- UPDATE: Added this paragraph — Commodity price Inflation: There is a real threat to recovery from commodity price inflation....
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But, remember, the developed world has a lot of problems to work through. The
origins of the next crisis are already apparent — and they have nothing to do with cyclical upturns and everything to do with a secular trend of rising indebtedness, now in both the public and private sectors in developed economies. If the developed economies use this cyclical upturn wisely to reduce household debt levels, to increase private sector savings, to clean up the balance sheets of weak banks, and to cautiously normalize fiscal and monetary policy, we will be in a much better position to counteract economic weakness when the next downturn hits.
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