Written by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Zions Bank

For the latest news on the economy and financial markets, please visit www.thredgold.com and sign up for Jeff Thredgold’s free weekly e-mail update.

The American Economy
…the recession continues
Domestic and global financial sector paranoia has contributed to major weakness within the U.S. economy. Enormous investment and lending losses have sharply curtailed the availability of credit.

Such financial sector weakness has led to creative and extremely costly government proposals to stabilize financial markets. These factors, combined with prior excesses in new home construction and existing home price appreciation, led to the current period of serious recession, which officially began in December 2007.

Budget Deficits
…off the charts
The combination of serious U.S. recession, enormous war spending, one financial stabilization program after another, and Congressional economic stimulus spending could see the fiscal year (FY) 2009 deficit, which began on October 1, 2008, easily exceed $1 trillion. The budget deficit for FY 2008 was $455 billion, also a record. Note, however, that much of the Government’s investment into major financial institutions will be returned to taxpayers in coming years as financial markets (hopefully) return to some level of normalcy.

Unemployment
…to move higher
The nation’s jobless rate reached 6.7% in November, a 15-year high. It could reach, and possibly exceed, 7.5% to 8.0% during 2009. By comparison, the jobless rate averaged 4.6% in both 2006 and 2007.

U.S. employment has declined for 11 consecutive months, with nearly two million fewer jobs today than a year ago. However, longer-term labor shortages, especially for skilled workers, will remain center stage for years to come.

Inflation
…to move lower
The sharp decline in oil and other commodity prices of recent months, should it continue or simply stabilize, will help unwind much of the inflation pressures that pushed inflation (the CPI) to a 16-year high of 4.1% in 2007. Most forecasters expect a 2008 CPI rise of roughly 2.0%, with a slightly smaller increase expected in 2009. Note that there are as many concerns about deflation during the next few years as about inflation.

The Federal Reserve
…just plain aggressive
The Fed has been a major player in numerous financial stabilization programs announced during the past 16 months. The sharp decline in inflation pressures provides the Fed “cover” to aggressively use its balance sheet to improve financial flows. Its critical federal funds rate was recently at a 50-year low of 1.00%, with the prospect of going still lower.

Solid evidence of U.S. financial stabilization and a resumption of modest economic growth in 2009’s second half—the current view of most economists—will lead financial markets to expect a minimal reversal of Fed policy late in the year or early in 2010.

Gasoline Prices
…like cutting taxes
Need a bit of “good” economic news? The plunge in gasoline prices from a high of roughly $4.25 per gallon in early July to around $1.50-$1.80 now is the equivalent of a $250 billion tax cut for American consumers. One concern is that prices could go too low…and put prior initiatives regarding developing alternative sources of energy on the “back burner.”

The Global Economy
…more slowing expected
Five years of powerful global economic performance gave way to major slowing during 2008. A global recession during 2009 is likely.

As in the U.S., global financial markets and major financial market players have been decimated by a loss of confidence…the most crucial component of the lending and investing process. If you don’t have confidence in the firms you lend money to, you simply don’t do it…just ask Bear Stearns and Lehman Brothers, now deceased.

Better news? Recent declines in energy, commodity, and many food costs have been good news for hundreds of millions of the global poor.

Asian economies are dealing with their own exposure to global financial market distress and slowing global exports, with various nations enacting their own stimulus packages. China’s recently announced $586 billion stimulus program comes to mind. A series of Chinese interest rate cuts have also taken place as this nation faces economic growth that may soon be half its prior blistering pace.

Japan’s economy continues to struggle to regain its 1980s economic magic. Today? Japan is again in recession. As before, the Japanese fear the rising Asian clout of the Chinese.

I have no doubt that European business leaders and politicians were laughing at the U.S. earlier in 2008 for the enormous financial mess we got ourselves into. The laughter ceased when the Europeans soon realized their challenges might surpass our own.

Europe is now dealing with its own recession, with limited prospects for emergence anytime soon. The weakness in home prices in many European nations exceeds that in the U.S., as many communities saw home prices skyrocket earlier in this decade. More interest rate cuts are coming from the European Central Bank.

Russia’s critics have had a field day in response to its aggression into Georgia. The Russians have experienced some of the global community’s most volatile stock market performance, in part tied to the collapse of energy prices.

Oil wealth continues to accumulate across the Persian Gulf. However, many investors are losing sleep because of massive commercial development commitments that were predicated upon oil remaining north of $100 per barrel…whoops.

Major South American nations struggle with much lower energy and commodity prices than their respective budgets assumed. Other nations in the region struggle with high taxes, enormous business red tape, and highly anxious credit markets.

Canada is facing its own likely recession as its major export market—the U.S.—struggles with recession. Growth in Mexico is modest, but must improve to provide greater opportunities for its citizens.

The Bottom Line?
U.S. economic recession will hopefully give way to modest growth by mid-year 2009. We also expect: a much larger budget deficit…rising unemployment…declining inflation pressures…record low short-term interest rates…stable energy prices…and a very weak global economy.

Happy Talk

We clearly face serious economic and financial challenges today. However, there are also many favorable developments taking place within the U.S. economy. This piece focuses ONLY on the “good” news…

• For every dollar of U.S. economic output generated today, we burn less than half as much oil as 30 years ago
• Donations to charity set an all-time high in 2007, with more than $300 billion donated by individuals, foundations, and corporations. As a percentage of GDP, Americans gave twice as much as the next most charitable nation…England
• Productivity of the average U.S. worker rose an average of 2.6% annually during the past 10 years, the largest gains in 40 years. Rising productivity is a long-term key to higher standards of living
• The number of people who have quit smoking (46 million) now exceeds the number who still smoke (45 million). Roughly 21% of adults smoke today, versus nearly half in the early 1950s
• U.S. exports to China have risen roughly 24% per year since 2001, making China the fastest growing market for U.S. goods
• Violent crime overall is down 55% since 1993, with violence by teens down 71%. School violence has declined by half from a decade ago
• Air pollution declined 25% over the past 30 years even as the population and the economy grew. Water quality also continues to improve. More progress will occur in coming years as companies see rising value in “going green”
• For the second time in two decades, the U.S. airline industry did not have a passenger fatality or major accident in 2007
• The upward “mobility” of the typical American remains the greatest in the world. Why? The U.S. economy “rewards” the combination of hard work and educational achievement more than ever before…and more than any other country in the world
• During the early 1960s, the five-year survival rate from cancer for Americans was one in three. Today it is two in three…continuing to climb…and the highest in the world
• Police officer deaths during 2008’s first six months were the lowest in 43 years
• A year-end 2007 Gallup Poll noted that “more than 8 in 10 Americans say they are satisfied with their personal lives at this time, including a solid majority who say they are ‘very satisfied’”
• Childhood obesity, which rose sharply over the past two decades, appears to have stabilized
• The U.S. still accounts for roughly 40% of global research and development (R&D) spending
• A record 29% of men have earned a bachelor’s degree or higher, versus 26% of women, also a record. This compares to a combined 7.7% in 1960. A record 84.6% of adults over age 25 now have at least a high school diploma, versus 24.5% in 1940
• Seat belt usage by Americans is currently at 82%, versus 49% in 1990 and 14% in 1983
• Flexible work schedules are now the norm for 43% of workers, up from 29% in 1992 and 13% in 1985. This allows greater flexibility for more people, especially those with children
• In 1967, only one family in 25 earned today’s equivalent of $100,000 or more. Today, one in six families does. The share of families earning more than $75,000 annually in real dollars has tripled from 9% to 27%, while the share of families earning between $5,000 and $50,000 in real dollars has fallen by 19% since 1967
• The U.S. role of dominance in the global economy in recent years has been as clear-cut as at any time since the 1950s

Return to the Insight Index