With a new year, and a new President, many people in the U.S. are making prognostications about the future of the economy. People are asking many questions…
How long will this recession last?
Have we hit bottom yet?
Will house prices recover?
Will the stock market recover?
Is now a good time to buy?
How much higher will the unemployment rate go?
Etc, Etc, Etc. Ad infinitum.
I have been having a field day reading all the predictions that have been coming out. Some are well informed and use massive amounts of data to back them up. Many are just off the cuff and have no basis in reality at all.
As many of you know I am a “closet economist.” I love studying business, politics, economics, and how they all intersect. For a primer on my economic philosophies please read, The Complete Newbies Guide to the Economy.
For the sake of this article I will not use data to back up anything. The amount of data I have sifted through is pretty ridiculous. And I assume (maybe I am wrong), that you don’t want a pile of data.
If you are anything like me then you realize that the economy, when it comes down to it, is only based on two things: the fundamentals & speculation.
When it comes to fundamentals one thing must always hold true. The economy is only as big as the total of it’s production: both goods and services.
When it comes to speculation one thing must always hold true. Money will flow to where people think they will gain most from their investment.
You can speculate on the fundamentals and you can speculate on speculation, but in the end it is all gambling.
So when you look at the economy and it’s indicators (the stock market, house pricing, etc.), you have to remember that what you see isn’t always what you get.
With that being said here are my 2009 economic predictions…
The Death of Dow Jones is true. We definitely will not see the Dow rise above 10,000 this year and may not see it above that mark for the next 5-10 years.
The data still points to a lot of uncertainty in the housing market. House prices continue to drop. We are off 18.5% from the July 2006 peak. Last year house prices dropped 10.6% nationally. What is interesting is that home prices fell in only 34 states. So in 16 states home prices actually increased although by very small amounts.
Ultimately this is a very regional effect. California is off by 27%. West Virginia, Texas, and South Dakota all had 3% or more price increases!
In December of 2007 I wrote a paper for my MBA program that cited a 10-15% expected median house price drop in 2008.
The worst states will continue to drag down the median house price in 2009. There is still a lot of fear about what Option ARMs and Alt-A loans will do in the next 3 years. The subprime mess seems to be mostly over, but we have another wave coming.
Luckily, I believe low interest rates have kept a lot of people from defaulting on these Option ARM loans. As long as they stay low for the next three years we may see some market stabilization.
The only trump card is unemployment. (Fact: Unemployment is always a trump card). If unemployment continues at it’s current pace then nothing short of a miracle will stem the continued fall in housing prices.
Without a huge analysis by geographical area or industry type I will say that unemployment will cause at least an additional 5% drop in median house prices.
With that being said, I think my prediction for 2009 is the same as 2008. We will see another 10% drop in housing prices off the 2006 peak.
Back to the stock market and unemployment…
We are seeing these layoffs because of the drop in the stock markets and the loss of capital that goes with it. To make their stocks look pretty again many companies are laying off thousands of employees to make the bottom line look more profitable.
In my opinion this is almost idiotic. Many of these companies do not need to layoff employees. There balance sheets are strong enough to retain many of their employees even in this downturn. Yet many, as we know, are in a struggle for their very life. Laying off people is their one chance for survival.
Like I have said before, the money is there, it’s just gone into hiding. Fear is what is causing it. Greed will once again emerge and bring it’s head into the light. As of right now, he is resting and waiting for the next opportunity.
One theory I have been harboring is the idea of market equilibrium. Although some people want to argue against it, many people believe there is a fundamental equilibrium that is often hidden within the speculation on the markets.
I take it one step further and say that the total amount of “production” in the world is steady and can not be changed. This is based on the number of people on the earth, how effectively they use resources, and how much they produce.
Population is going up so the world economy as a whole will continue to grow.
Resources are both going up and coming down. More people equals more resources. More ways to produce renewable energy produces more resources. More technology or productivity techniques equal more resources. What we are losing are our “unrenewable” resources such as coal, oil, and natural gas. Forests are harvested and the seas can be depleted of fish faster than they can reproduce, but they are still renewable resources.
With increased education and disbursement of technology people will continue to find ways to be more productive.
When you look at things that way you realize that we are still on a worldwide trend upward. Yet, even with the vast interconnectedness of the world, economics are still localized.
The U.S. looks to remain productive and therefore growing in the years to come. Even though the Baby Boomers are supposed to be retiring in mass and sucking off government programs that our tax base can’t support, I am starting to believe that this may not be such a big deal.
Immigrants will help replace Baby Boomers as they retire. They will also demand many goods and services that will help support the economy as well. Immigration is high and will continue to remain high as long as our borders remain open. Immigrants tend to have large families and will help replace many of the older generation. Birth rates still look like they will remain high as well. We still maintain the highest population growth of just about any industrialized nation.
With that being said, I think we will see a job recovery faster than we see a stock recovery. (This is contrary to most economists views. They believe investment must flow back into stocks before companies will start hiring in mass again.) Although 2009 will still be a bleak year.
You can expect unemployment to rise above 10% in 2009. We will see a short term recovery in the 4th quarter of 2009 and the first quarter of 2010, with unemployment stabilizing at 7-9% in 2010.
2009 will be an interesting year. I think things will appear to be stabilizing when in fact we will be preparing for another huge market correction near the end of the year that will last into 2010. My hope for any recovery is in 2011. Get ready for an interesting election year in 2012 where retirement plans, social security, and health care will be addressed.
Here is to another wonderful year of great media stories! 
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Jeremy
Anyone who uses the word ‘prognostications’ in a post title deserves a medal in my opinion. Isn’t it a great word? I confess I skipped most of the post when it was clear I wasn’t going to find any prognostications for Poland or Eastern Europe. Any idea what’s going to happen over here?
btw .. I really hope you’re wrong and that things pick up more quickly. I suspect you’re not wrong though!
Ian
Ian Peatey’s last blog post..Signs of life
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Honestly? I’m very surprised at myself that I read this post all the way through – normally stuff like this bores me to tears! LOL
Seriously, though, something that drives me bonkers is how everyone is saying they’re broke and there’s no money, yet you can’t get down the crowded store aisles or find a parking place. Everyone and their brother seems to be shopping, shopping, shopping, spending, spending, spending – and those lines are horrific at stores.
Maybe I’m way off here and I don’t like looking at the overall picture, but I just want to shout from the rooftops that everyone is shopping and spending. Shouldn’t they be saving and planning? Ugh. :-
Okay, that’s out of my system now.
I did find this post quite interesting, so I gave it a stumble.
*smiles*
MicheleMichele’s last blog post..Don’t Let Your Past Keep You from Your Future
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I think those predictions are fair enough and most possible to occur.
I would add that the dollar may loose more value which in turn commodities will rise.
Oil I think would be on the rise too, as we have seen recently.
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You continue to amaze me every time, my friend.
I am going to bookmark and stumble this bad bear because it is the most rational and clear headed explanation of economic factors I’ve ever seen.
Oh, and is there anything you DON’T do?
Cheers,
George
Tumblemoose’s last blog post..The long and the short of it
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Hi Jeremy! Indeed, the money is there – it just went into hiding. A lot of reactions in the crisis so far are more based on emotions rather than rational thinking. While people are looking at the crisis as a dread, I see a lot of good coming out of it actually – it has given us a lot to observe, think and learn. Stumbled and reviewed!
Celes | EmbraceLiving.Net’s last blog post..Goal Achievement: Review
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@ Celes – Because much of this is based on emotions we have what we have. Communism was a way to “rationally” control resources, but so far every implementation of it has been effected by emotions. We just can’t get away from it. Therefore, a capitalistic market with certain government regulations seems to be the best form. Using emotion for gain, and rational thinking for control. The horse must be harnessed to be of any use. Government MUST use its control to protect us from ourselves (rationally) and not use its power to pander to the lobbyists (emotionally).
@ George – I am a student of the world my friend and I am in constant pursuit of the Renaissance ideal.
@ Tom – You know, I should have mentioned this. The dollar will remain strong because every other economy is faltering relatively more than the US economy. Oil will rise a little but not much. June delivery is scheduled for $50/barrel. That will bring us up close to the $2 mark for summer, but it should not go much over, if at all, this year.
@ Michele – haha. I had the same expectations too! I figured there would be less shoppers. What you have to take into account was that we just went through the holiday season, AND many people who would shop in higher priced stores have started shopping in lower priced stores which makes them seemingly crowded. But there is less consumption for sure, otherwise we wouldn’t see many of these companies going out of business.
@ Ian – You know, the Euro is holding steady right now, and its the British pound that is taking a pounding. (pun intended) I hear you guys may start using the Euro by 2012. From what I know, Poland has a relatively stable economy that shouldn’t be effected by too much of what many parts of the world are going through. However, if your government does what the rest of the world is doing it may set itself up for a period of inflation. In any case, you should keep me updated. I love to hear how each country is dealing with its own economic situations.
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Jeremy, I hear ya. I do realize businesses are going under, but if you’re just looking at the “now” when you’re out and about, seeing all those folks spending it seems like it’s a hoax, ya know?
*smiles*
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This is an interesting display of knowledge; however, I am expecting you will not act upon any of your predictions.
Could you make an equally intelligent argument against every single one of your predictions? I’m sure you could… Could the Dow Jones cross 10,000 in 2009? Sure it could. Now make a case just how and why that might transpire.
It is wise to practice your own “counter-argument” or dialectic with yourself. For example, your human tendency is to confirm your own pre-conceptions (this is called “confirmation bias”). It appears you’ve already made a case for your pre-conceptions; now make a case against them. You may be able to form a logical basis from which to act (or not act).
I have struggled with my own temptations to make economic predictions (but I try to stop myself from doing so) because one thing I’ve learned in my years of investment advisory work is that no one knows what tomorrow will bring.
“The difference between what the most and the least learned people know is inexpressibly trivial in relation to that which is unknown.” ~ Albert Einstein
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People are going to spend money when they are accustom to doing so and in a recession it is expected.
As far as your emphasis on emigration this might be the Mexican border but come on!
Many Europeans live here with out any intentions of becoming US citizens and they contribute or would not be allowed to stay.
One of our country’s proudest promises is based on being a melting pot for opportunity for anyone that enters.
I am with you on the money being there but not on the above subject:)Bunny got Blog’s last blog post..Insights From Blogging, Knowledge For Life
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@ Michele – Agreed.
@ Kent – The honest truth is that I wanted to see a year from now if my predictions are even close. But you are right, it was a temptation I gave into.
And I am actually acting in direct opposition to my predictions. I am leaving a house that I should be staying in and will probably take a loss on it. If I truly believed in my predictions I would probably stay in it until the housing market recovered.
Here is my argument for the Dow crossing 10,000. As I said, the money is “in hiding”. Many investors, both institutional and individual, are holding onto cash, gold, foreign stocks, you name it. At any point during the year one of those assets could drop enough to “scare” people back into American stocks. A significant increase in the Dow could cause people to “rush back in” and cause it to surge over 10,000 again.
I guess I just wanted to see how close I could predict the most likely scenario. We will see in another year.
@ Bunny – Im sorry, I think you misunderstood me. I was making the case that immigration is good. For most of the past century immigration levels were low but are now at a near all time high. I just read that 2000 was the first time immigration reached the same level as in 1900. I was mainly making the case that immigrants will help replace Baby Boomers as they retire. I think I will rewrite that section as I realize I got a little sloppy at the end.
Cheers,
Jeremy -
Jeremy,
I try to avoid fear and put that aside, and I work at being fair and honest with my money – I am not much of a shopper and don’t think I will start now – I don’t need or want things…( well I love my Kindle!)I am overwhelmed by all the media hype of fear and how many people are taking “chicken little stuff” and working others into a lather. The failure CEO’s taking my money and other tax payers money is very alarming to me –
That those who need re balancing themselves are getting the money to fix the mess? What is this?
The whining about responsibility is nasty….
One day at a time and chop wood and carry water…
I read every word and contemplated…it was very clear and I appreciated that thank youPatricia’s last blog post..Me vs. Them
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For those with sufficient financial capacity, I would have thought that the current situation would mean that there are plenty of opportunities to pick up shares of companies with good long term prospects at good value prices.
However, I personally would give one note of caution, and that is that firms which do not have a strong balance sheet may not survive the likely challenging period ahead in the near term in order to have a long term future.
What I am doing myself is choosing firms with a solid history with respect to earnings, a reasonably sound business model and most importantly, a strong balance sheet. These are the firms which are likely to survive the anticipated lean times and then be positioned to take advantage of the anticipated recovery when it eventually occurs.
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