2011 Economic Forecast - Part 2: The United States (Us)
2010 is finally history. The economic recovery, which officially began in 2009, was scarcely evident as the Us cheaper muddled through 2010. It seemed that for every piece of good news, like the strong end to the 2010 Christmas shopping season, was countered by news of a setback, such as unemployment rates that unexpectedly returned to nearly 10% during the same period.
2011 Economic Forecast - Part 2: The United States (Us)
The government's stimulus efforts have run their course. The Tarp agenda is officially over and tax due for new home buyers have all expired. The cheaper now has to achieve on its own without all that artificial stimulation.
The fed has reduced interest rates to historic lows to internally stimulate the economy. If interest rates were the cause of The Great recession this action should have revved up the cheaper and put us back on track. With federal support interest rates at 0% the cheaper should be white-hot. However, high interest rates are not the problem, so lowering them did not spark an economic rebound. Here's why with my forecast for 2011:
Unemployment Will Probably Stay Stuck Near 10%
The dirty slight inexpressive behind this statistic is that the 10% outline represents only those who currently have no earned income. Those who are working one or more part-time jobs because they can't find a full-time work, are underemployed in their field, or who are laboring out-of-bounds of their education or training are considered by the government to be employed. When this wide population is taken into account, the actual unemployment/underemployment statistic is most likely duplicate the official figure.
Unfortunately, there are now complicated barriers to lowering our now chronically high unemployment level. Some of the most prominent are:
The huge oversupply of foreclosed and unsold homes - The reasoning here is straightforward: there is no need for new construction in a saturated market, which means no construction jobs. Jobs in support industries that contribute new home construction goods and services will obviously also be affected. More on this topic below.
Continued restraint in buyer spending - more on this topic below.
Major (and many smaller) corporations continue to outsource overseas all from manufacturing to admin support - much is made of sending low skill or semi-skilled manufacturing jobs overseas, while the Us supposedly maintains its edge through high tech startups at home. The government likes to point to numerous high tech startup associates as proof this strategy is working.
Some entrepreneurs do successfully start corporations that may at last employ 50 white collar workers. However, the product they originate is outsourced to manufacturing overseas in a factory that employs perhaps 5000 workers to yield it. Granted, it may cost less per unit to create there, but those 5000 low skilled or semi-skilled workers employed there are exactly the type of man most likely to be unemployed in the Us.
So, manufacturing, the great economic engine that for over 100 years was the promise of the high school graduate being able to enter the middle class, is essentially gone, which in great part explains the growing class rift in our nation.
Note that when manufacturing is sent overseas, the outsourcing business essentially has to teach the foreign corporation how to originate the new product, which is new knowledge that a foreign power can use to its own benefit. China is the best example of this. We have successfully trained and paid the Chinese (and others) to beat us at our own game, as evidenced by China's growing economic might and a political proximity that now must be reckoned with.
Hiring temporary workers, rather than in-house employees - temporary or ageement workers are far cheaper to hire than in-house employees who qualify for benefits like health insurance and the retirement program. The business owes no loyalty to temps or contractors, and they can be hired and fired at will.
Corporations no longer hire employees with "potential" or touch in parallel or complementary industries - major corporations have ceased to think long-term in many areas, shifting their focus nearly exclusively to near term actions that yield short-term results. Examples of this myopic view range from focusing on the next quarter's stock revenue per share to viewing employees as a short-term commodity rather than long-term assets.
Viewing employees as a commodity results in corporate behavior of hiring what's needed for the occasion and discharging them when the immediate need disappears, which in turn results in a goal of only searching for and hiring employees "who can make an immediate contribution to the lowest line."
The exponential increase in education, credential, and touch criteria for candidate employees over and above actual position requirements - new hire employees are now incredible to "hit the ground running" and be able to "make an immediate contribution to the lowest line." Like a new electronic gadget, a new laborer should be able to "work right out of the box."
This new hope was unheard of only a few years ago during the era when employees were a indispensable asset to be invested in over the long term. Then, new hires weren't incredible to be able to make meaningful contributions until they had been with a corporation long sufficient to learned the ropes.
Now, most hiring authorities don't even make the effort to understand what skill set is categorically required to achieve the job they're hiring for. So, advanced degrees, myriad industrial certificates, and modern touch in all are specified in the hope that the overkill will result in a man at last hired that can do the job.
These immoderate requirements are then passed to the human resources (Hr) department, which dutifully uses them as an inflexible tool to screen the applicant database. The popularity of online employment applications has exacerbated this problem, where the Hr man can enter "Mba" as a crusade term and never see the many capable, well considerable population who are discarded because they don't have this degree.
As an example, you may not need an engineer with an Mba to be the head of a maintenance department. The great candidate may well be a soldiery veteran non-commissioned officer (Nco) who successfully ran a heal depot. Hiring the old Nco would bring superb talent and a broad background into the organization, could probably be hired at a substantial savings for the company, and may stay with the business longer than the very credentialed engineer who is intent on furthering his occupation climbing the corporate ladder.
Further, most large corporations have returned to profitability during the Great recession through greatest cost cutting, mostly through layoffs in their labor force. Employees who survived the purges were told to take on the extra responsibilities of their old colleagues, so technically the same number of work is being performed by fewer population (which is responsible for the great gains in national productivity figures compiled by the government and widely reported in the media). This advent obviously places all the indispensable skill set eggs into fewer baskets, which creates entirely predictable problems when the new multi-taskers at last leave and corporations try to replace them with someone else single man who can do the newly defined mega-job, rather than spreading skills (and risk) over any employees.
The well documented bias against hiring the unemployed - On the covering this bias may seem counterintuitive, after all, man who's unemployed is easily available and could probably start Monday, right?
However, the corporate thought process ordinarily follows this logic path; "most corporations layoff their least efficient workers during a downsizing, therefore if you're unemployed you were among the least desirable or efficient workers or you wouldn't have been laid off. It follows then that there must be something wrong with you that we don't know about, otherwise you would be employed" regardless of your skill set, modern experience, or personal references.
It's unfortunate that this twisted and nonsensical logic that is frequently imposed on situational "outsiders", from marital status to any of society's other membership groupings, has now found its way into corporate hiring mentality.
I recommend Louis Uchitelle's book, The Disposable American, for more on this topic. (I have no financial interest in this recommendation.)
The unemployment lowest line - The unemployment/underemployment rate will slight convert in 2011, with those fitting the categories above most affected.
Real Estate Foreclosures Will Continue at a narrative Pace and Housing Prices Will Remain Depressed in Most Areas of the Country
The government statistics here are shocking, with estimates that nearly half (Half!) of all homeowners with mortgages have homes that currently appraise for less than the mortgage value; they're "upside down". Further, nearly 20% of all mortgages nationwide were in some stage of foreclosure at the end of 2010, with rates much higher in the hardest hit states of Michigan, Florida, Arizona, Nevada, and California.
The efforts of the banking commerce to work through this immense backlog lead to the "robo-signing" fiasco, where foreclosure paperwork was being routinely popular ,favorite under oath en mass without verifying what was being attested to in the court documents. Faced with active investigations by attorneys-general in all 50 states, banks temporarily suspended foreclosure proceedings during the 4th quarter of 2010 to straighten out the mess they created, which the news media widely (and inaccurately) reported as a sign the cheaper is improving. However, the backlog must be worked through to get the bad debt off the banks' books, so foreclosures will resume at perhaps even a greater pace when the paperwork is straightened out, probably by the second quarter of 2011.
The huge inventory of foreclosed and otherwise unsold homes will keep housing prices depressed. As long as there are so many unsold homes on the store (with more to arrive when the banks resume foreclosure processing), the oversupply will keep prices down and may drive them ever lower in 2011. Even after the foreclosure backlog is reduced, many new home sale listings will appear on the store when prices start to rise from the concealed backlog of those who want or need to sell, but didn't list when prices were low, which will depress prices again. I wouldn't be surprised if it took until 2015 to work through this immediate and inexpressive backlog.
The real estate lowest line - in most markets, residential real estate values will remain depressed or will decline added in the high impact states. Now is the time to buy if you have revenue security, the indispensable available cash, an substantial credit rating to qualify for a mortgage, and can find a bank willing to lend.
Energy Prices Should be Stable
Recent articles in authoritative publications have reported that on-shore crude oil storehouse is full to capacity and that mothballed tankers functioning simply as floating storehouse tanks are anchored off the coasts of Great Britain and Iran. A modern inventory showed that 50+ tankers were anchored off of the coast of England alone.
Most oil producing countries obtain the majority of their national revenue from crude oil sales, so their incentive is to keep pumping, regardless of store price, in order to sound their revenue stream, which will keep supplies abundant. So, the world is awash in crude oil, with inventory shop in excess of demand, putting downward pressure on gasoline prices. Overall, gas prices should remain relatively carport during the first half of the year, absent an unplanned disruption like a major refinery fire or a hurricane that destroys oil platforms. That's good news for every household and corporate allocation in our petroleum-based economy.
The wild card is China, again. Prior to the recession, China became a net importer of crude oil and was starting to compete on the world store for the slight contribute of crude available (remember 0 per barrel spot store crude?). If other world economies heighten and start intriguing more oil, then everyone will return to competitive for slight power supplies on the world market. And China will most categorically win any contest here, because their trade surplus has given them an unlimited contribute of dollars to buy oil with.
The power lowest line - power prices will most likely gradually increase throughout the year as the fragile saving continues and the economies of the world pick up steam.
An alternative scenario is that power prices remain carport when China's real estate bubble collapses (see 2011 Economic Forecast - Part 1: The World View from a Us Perspective for elaboration on this possibility), causing a large loss of personal wealth for the midpoint Chinese citizen, dramatically driving down internal consumption, and prominent to China's own internal economic recession.
Crude prices will not decline because Opec will adjust yield to sound oil in the -0 price range.
Consumer Spending Will Remain Flat
People out of work spend only what they have to on the barest necessities. population who are afraid they will be next out of work, cut back on spending in order to save for what might come to pass, and also focus on buying only the practical, needed, and necessary. population who are obtain in their jobs, but don't want to be seen conspicuously intriguing during hard times, will curtail their luxury purchases. Need I say more?
Further, it's underreported that the historically low interest rates have meant a sharp drop in savings interest revenue for retirees. Retirees dependent on interest revenue have had to sharply reduce their spending in order to avoid added encroachment on their principal. Typically, the allocation cuts contain things like the lawn service contract, the charm shop, dry cleaning, and eating out, all of which impacts local businesses.
The modest economic improvement widely reported during the last half of 2010 is probably the result of businesses simply restocking depleted inventories to low levels, which is good news but not great news. However, the buying surge that turned the 2010 Christmas shopping season into a last slight success means that retailers will start 2011 on great financial footing because they won't have to start the year having to liquidate seasonal inventory (and profits) at 50%-70% off to originate cash flow.
Additional reasons that I think buyer spending will continue to be restrained in 2011 contain the increased personal savings rate (an eventual benefit, but lowers buyer spending in the short term), a focus on reducing credit card debt, unplanned new car payments in the household allocation resulting from the federal Cash for Clunkers program, and credit that's either not available at any price or only at unfavorable interest rates and terms when it is.
The buyer spending lowest line - buyer spending on non-essential purchases will continue to be restrained in 2011. When consumers do make purchases, they will focus on the needed, necessary, and practical, and avoid luxury items even if they can afford them. Family vacations will be to local or regional destinations, rather than the exotic venues.
The Credit-Starved Economy
It's widely reported that large corporations are currently hoarding large amounts of cash. This stockpile gives them the capability to hire, expand production, and grow organically if they wanted to, but they are refusing to do so in light of what I've shared above. Even a White House meeting with the president in 2010 wasn't sufficient to persuade them to resume hiring if they can meet store query with staff on hand.
However, large corporations continue to have aspirations to grow and, rather than gradually growing organically, the formula they're often selecting is rapid increase through acquiring their competition. When associates combine, the result may perhaps be good for the new, larger corporation (the marriages ordinarily have a 50-50 chance of industrial success), but the result all the time has two negative economic impacts:
The cash and loans required to buy the competitor removes large amounts of capital from the store that would otherwise be available for mortgages and loans to small and mid-sized businesses (Smbs), and
Mergers all the time result in layoffs as the new corporation works to eliminate duplicate functions to help pay for the merger. After all, you don't need two payroll departments, two Hr departments, two training departments, etc.
So, large corporate mergers have a break even chance of internal benefit, but nearly all the time have a negative impact on the economy.
Credit will most likely continue to be tight for Smbs in 2011. Banks say they have money to lend in this area, but the reality is the qualifying bar is set so high that very few will be able to meet it. It's considerable that this economic fence persists despite the availability of government Small business management loan guarantees and the president repeatedly summoning banking Ceo's to the White House to urge them to begin lending again.
Finally, a coarse source of loan collateral for Smbs is no longer available in most cases. In areas hard hit by the collapse of the real estate market, the business owner's home equity line of credit has been wholly erased if the property value is now less that the superior mortgage balance. Even if there is some equity technically available, few business owners have the stratospheric credit scores indispensable to qualify for the loans.
If longer term loans remain unavailable, Smb's will turn to the only recourse they have left, which is financing their need for operating cash with personal credit card debt. Unfortunately, this selection is fraught with danger because lending institutions issuing credit cards are rapidly changing card terms, raising interest rates to usurious levels, requiring most new cards to have changeable interest rates (a institution which helped get us into this mess in the first place), and lowering credit limits in response to the new federal laws enacted in February 2010. These moves effectively sidestep the legislation intended to curb these abuses.
At a time when banks can borrow at 0% from the fed, it's not uncommon for the credit cards they issue to payment 15% or more on superior balances. Further, the new laws do not apply to corporate credit cards, exposing the business to even greater financial risk if the owner is forced to finance via this route.
The credit lowest line - expect slight or no improvement in credit availability in 2011.
The Impending industrial Real Estate Tsunami
Commercial real estate values and investment revenue will probably take a drubbing as vacant store fronts drive down rents renegotiated in 2011. Failing businesses have created a glut of vacant industrial space in many areas and vacant industrial space doesn't originate income. Surviving business owners will have any alternative locations to choose from and will use the oversupply as leverage to negotiate lower lease rates for the space they do occupy for as far into the hereafter as possible.
And devalued properties of all types will have an adverse result on local tax digests, forcing local governments to either raise property tax rates or trim operating and school budgets. Which of these choices do you think your local government will make?
Deficit Spending and the Growing Threat of the National Debt
Fiscally, the United States is in a mess and is rapidly approaching the financial meltdown so many European countries are currently experiencing.
The yearly allocation deficit - the federal government currently spends for every of revenue it receives and the yearly spending gap is now over a trillion dollars (a Trillion dollars) a year. Proposals to close this gap through either increased tax revenue, such as eliminating the homeowners mortgage deduction, or by cutting spending, such as cutting back on Medicare entitlements, meet with howls of constituent protests and go nowhere in a hurry. Note that Medicare alone accounts for 12% of all federal spending and that outline is safe bet to increase as baby boomers begin to retire in large numbers from the workforce.
The federal government currently spends ,000,000,000 more every 8 hours than it brings in. It's ridiculously safe bet that this can't continue for long, yet collectively Congress keeps kicking the can down the road to tomorrow (figuratively speaking) instead of dealing with the issue.
The Us government borrows money to support this deficit spending through the sale of Us treasury bonds. during World War Ii the debt was largely financed internally with American citizens buying "war bonds" at rallies that featured real-life war heroes on display.
Today we sell our bonds to foreign powers finance the deficit. Who's buying them? The largest single buyer, by far, is China, followed by Japan, Germany, and the Arab Opec nations. So, we are effectively (and quietly) being held hostage to those who buy large amounts of our bonds, because if they don't buy them, then we can't operate the federal government. It follows, then, that the nations buying our bonds use this leverage to exercise indispensable influence in our behavior behind the scenes. We are no longer a totally independent nation.
Larry Burkett's book, The Illuminati, is a fictional work about a foreign country that brings down the United States using exactly this leverage. For those who say that can't happen, the book makes an intriguing read of a plausible scenario. (I have no financial interest in this recommendation.)
The national debt - The accumulated national debt has reached an unimaginable size. The old management added more to the national debt than all old presidents combined, together with Ronald Reagan's, and the current management is on track to exceed this sorry milestone in just its first 4 years in office. We continue to add to this debt, which must be paid back at some point, roughly without thought. For example, the president's much heralded tax deal forged at the end of 2010 added 0 billion dollars to the national debt in extended revenue tax cuts, added jobless benefits for the long-term unemployed, and a temporary cut in public security taxes without corresponding cuts in public security spending, at the stroke of a pen.
Predictions are, depending on interest rates, for interest payments alone to equal all non-defense spending of the federal allocation by perhaps 2015.
There are only 4 ways out of this mess and they will become increasingly painful the longer we, as a nation, avoid changing our spendthrift ways:
Massively cut spending - this will be very difficult, since the federal allocation would have to be immediately cut by 1/3 to be able to simply stop borrowing. It would have to be cut even added to begin paying back indispensable on the debt.
This step will added impact the national unemployment rate as large numbers of government employees are laid off in the downsizing, as we have seen happen in the European Union bailouts. Most beloved government programs would have to be axed or pushed off on the states to fund, such as Medicare, which currently consumes 12% of the yearly federal allocation alone.
Enacting huge tax increases - this move will originate howls of protest because no one wants to pay more of their hard-earned money for fewer services. As an example, how easy do you think it would be to eliminate the cherished homeowner's mortgage interest deduction?
Defaulting on the debit payments - this is an admission of bankruptcy, pure and simple. If we take this route the government's passage to credit on the world store would immediately dry up. After all, if we stop paying on our current bond obligations, how many more bonds do you think we could sell to foreign governments the next time we needed to borrow money?
Printing dollar bills - this is the route to hyperinflation, because as the money contribute increases the value of each dollar falls. The most often cited example of the folly of taking this route is the Republic of Germany following World War I, as it struggled to meet the surrender terms imposed by the Allies and make payments to the successful nations for the cost of the war. Germany was forced to print money to meet its financial obligations, sparking the hyperinflation recorded in the pictures of German citizens in the 1920's hauling wheelbarrows of money to the grocery store to buy a loaf of bread.
The national debt lowest line - At the present rate of deficit spending, interest payments on the national debt will overwhelm the national allocation by 2015. At that point we will be left with 4 stark choices to deal with the mess we've created: massively cut federal spending, enact huge tax increases, default on the debit, print money, or do some mixture of these choices. The outlook is stark.
The Us National Forecast lowest Line
What does all this mean? Well, in the near term a realistic forecast is to be cautiously optimistic that the fragile saving will continue, absent any added shocks to our financial system. However, the cheaper will be dragging a ball-and-chain along with it in the form of high unemployment, depressed industrial and residential real estate markets, the lack of available credit, the corporate preference to obtain the competition rather than hire new employees, and the looming national debt crisis.
If the scenarios above make sense to you then my suggestion is for small and medium-sized businesses, like professional practices that depend on elective procedures and service commerce businesses, to be prepared for clients and patients to continue to defer discretionary spending until at least the second half of 2011. If you're a retailer, you should keep inventories lean for the first half of the year.
And my personal suggestion is for everyone to reduce their personal debt to as close to zero as potential by 2015.
Will this all come to pass? It's hard to tell because we haven't been here before, but I've shared my best guess. Do you think I nailed it or do you have a different opinion? I look forward to your comments.
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