Analyst: 2009 outlook gloomy with glimmers of hope

Growth in the Gross Domestic Product likely will be “quite weak” for most of 2009, and even after an expected turn in the second half, growth will be below long-term trends. That is the assessment of William Strauss, senior economist and economic adviser for the Federal Reserve Bank of Chicago. Strauss addressed the Heavy Duty Manufacturers Association’s Heavy Duty Dialogue on Monday.

Strauss warned attendees that his news would not be good, saying that “the charts I’m going to put up are kind of scary.” The current recession will be long – potentially 18 to 24 months compared to the average of 11 months. The decline in GDP from beginning to end of the recession likely will be about 1.8 percent, slightly higher than the average 1.4 percent drop. But one of the biggest worries is the job loss, which could reach 3 to 4 percent rather than the 1.6 percent average.

Industrial production likely will continue to fall in 2009, although at a slower rate than in 2008, Strauss said. Industrial production dropped sharply in the second half of 2008 and was down 6 percent for the year. In 2009, industrial production is forecast to fall 2.7 percent before rising 3 percent in 2010.

Another key measure of economic activity – housing – looks to face another bad year, Strauss predicted. “The supply of new single-family homes is extremely high.” Although some areas are doing far worse than others, on a national basis there’s about 13 months of housing inventory without any construction.

Net exports due in part to a weak dollar had been offsetting domestic weakness, but that too fell off in the second half of 2008 due to a global slowdown. “What we’re experiencing in the United States is happening around the world,” Strauss said.

There are some positives, however, Strauss told Dialogue attendees. Inflation has reversed course – in large part due to the movement of oil. “Every 1-cent drop in the price of gasoline adds a billion dollars to consumer spending.” Core inflation now is in the “comfort zone” and likely will moderate in the years to come. Unfortunately, the reasons for softness in prices for goods and services include the 3.6 million jobs lost since December 2007 and the pull-back in consumer spending since the first half of 2008.

Another positive trend is that productivity remains solid, Strauss said. And if there are silver linings to the collapse in the residential housing market, it’s that the market can’t go much lower and the impact of housing on the overall economy is diminished. “There’s only so long you can fall at a 20 percent rate, and a 20 percent decline in housing today is not equal to a 20 percent drop a couple of years ago.”

Finally, Strauss reassured the audience that while the recession is long and deep, it’s nothing like the Great Depression when GDP plummeted 26 percent and unemployment reached 25 percent. Then, the government had no backstop for banks like today’s Federal Deposit Insurance Corporation. The Federal Reserve did not respond aggressively the way it is doing now. And because balanced budgets were assumed, the federal government reduced its own spending as tax receipts fell due to a slower economy.