In view of my post yesterday describing how close the data came to contraction in the second and third quarters of 2011, now is a good ttime to grade myself on two pieces I wrote last January forecasting the economy for 2011. A few things I got wrong, and at least one thing I got bone-chillingly correct.
My first piece was 2011: Self-sustaining recovery vs. political idiocy (and Oil). I said that 2011 would probably unfold in three phases. Relying on the continuing positivity of the LEI, I said:
1. The first quarter - good growth is likelyNope. While I can fairly plead the Japanese earthquake and tsunami as an unforeseeable shock, the economy was already beginning to fade in February, due most likely to the Oil choke collar already kicking in.
Given the backdrop of consumer spending fueled by the recent increase in the real personal savings rate, Q1 2011 looks like a good bet for above trend economic growth.
But if I was wrong about the first quarter, read what I said about what would come next:
2. The second and third quarters - beware political idiocy (and Oil)While deflation didn't appear, and the timing was a little off, I submit that there are few watchers of the economy who could match that forecast for bone-chilling accuracy.
While it is a near 100% certainty that Congress will not pass any economic stimulus packages, the real problem is whether they can simply leave the recovery alone. This crew gives every sign that they will not.
At some point in March or April, a debt ceiling increase will have to be passed. This Congress gives every indication of preparing for first class brinksmanship and idiocy on that score - meaning that either a government shutdown and/or default will actually occur, or dimwitted austerity measures will pass. So much for the second quarter.
A second episode of idiocy will occur in June when the last of fiscal aid to the states ends. I see zero chance for any extension, and thus renewed budget cuts and layoffs visited by the "50 little Hoovers." So much for the third quarter.
Against this is the backdrop of $90 Oil, which we once again saw in December. I should point out that the inflection point - Oil at 4% of GDP - given general inflation and GDP growth, is probably now more like $94 a barrel. But continuing expansion in Q1 should push us there. As with 2010, the effect of the price of Oil depends on how far and for how long it overshoots that mark. At this point I do not anticipate much of an overshoot, but combined with Congressional idiocy, this should be enough to restart fears of a double-dip in the April-July window, as a brief deflationary spurt again appears as Oil kills some demand are retreats in price.
All in all, there is an excellent chance for deceleration, although probably not outright decline, in the second quarter and over the summer.
Finally, I said:
3. The fourth quarter - the yield curve reasserts itselfCongressional idiocy did stop for the while, and the decrease in the price of gasoline did boost demand as the final quarter showed renewed growth (although the deflation I foresaw did not start until the October CPI and is ongoing)..
Congressional idiocy probably will not recur after midyear until the end of 2011. The decleration discussed above should cause Oil once again to back off. Under these circumstances, with deflation off the table or over with, the yield curve, which has been relentlessly and increasingly positive ... will likely reassert itself. As I do not see the Fed becoming senile and decreasing real money supply, this should signal re-accelerating growth from about Labor Day until year's end.
In the second part of my 2011 outlook, I said that there was a race between household deleveraging and wage deflation. I'll write more about that after Friday's employment report.
Feel free to weigh in with plaudits or brickbats.