Monday, January 10, 2011

2010: My report card

- by New Deal democrat

A year ago I posted a preview of the year, 2010: Gilded Recovery, or Double Dip? (and Oil). With the year over, let's look back. How did I do?

To begin with, in late 2009, I also made a specific prediction that Jobs would start to be added in the December 2009/January 2010 timeframe +/- one month. Although initial payroll reports were negative through February 2010, after revisions my jobs prediction turned out to be spot on, as December 2009 was the bottom. (Mind you, this gold could turn back into dross once the BLS releases its annual revisions next month, but for the next few weeks, I can continue to pat myself on the back).

At the same time, contrary to every other econoblogger who ventured an opinion, I wrote that "In the case of the recoveries from [severe] recessions, payrolls started to grow as the ievel of initial jobless claims crossed 500,000, not 400,000." In fact, in this recovery payrolls turned positive at about the 480,000 level on initial claims.

Next, let's recap the highlights of last year's preview:
- the biggest issue before us is whether on the one hand the "Gilded Recovery" of the 2nd half of 2009 which was driven by spending by the top 10% income-earners broadens out, or does the economy sink into a new contraction, or double-dip.

- The Near Term - Strong growth is likely

The simple fact is, the first 3-6 months of 2010 are probably going to show growth, and indeed more strong growth than few dared to hope for in 2009.

....Keep in mind that under "Okun's law", really just a rule of thumb that economists use, we need to see at least 2% YoY GDP growth(some would say as high as 3%) to be consistent with job growth. We're probably going to reach that this quarter,

- The Long term - K.I.S.S. vs. Oil

I call [the yield curve] the K.I.S.S. indicator. If you look at only one indicator and nothing else, this is the one to observe. Needless to say, the strongly positive yield curve now foretells strong economic growth throughout the entirety of next year - provided there is no deflation.

....[B]oth Prof. Paul Krugman and Calculated Risk are calling the likely good [4Q 2009] GDP reading that we are about to see a "blip" that can be attributed to inventory restocking.... I agree that GDP is likely to subside, but disagree with the analogy.... strongly positive GDP will subside as inventory restocking fades, but that by no means foretells a double-dip.

In summary, if consumers once again have to pay over $3 a gallon for gas (which ~$90 Oil would give us), it will have a psychological as well as economic impact on consumers, and I would expect them to cut back in other areas. This looks likely to be the case.

Whether $90+ Oil will lead to a full-blown double-dip economic contraction, or just a slowdown later in the year, is almost impossible to gauge. It depends upon how far over $90 Oil shoots, and how long it stays there. If there is a dramatic overshooting a la 2007, there will be a double-dip. If there is a gradual increase over $90 that does not last that long before consumers cut back and the feedback loop causes price declines, then there may just be a slowdown, or if there is a contraction, it may be shallow and only last a quarter or two -- which is my best guess, and only a guess, at this point.

- Conclusion: The Gilded Recovery

IN CONCLUSION, 2010 looks like it will be a year very much in two halves. The first half will feature growth, and much stronger growth than most anticipate. Depending upon the behavior of Oil, the second half may just show us somewhat more tepid growth or by the fourth quarter there may actually be some contraction, although there is no sign whatsoever at this point at least of a repeat of "cliff-diving."
The year 2010 did unfold pretty much as I thought, with one important exception. The first quarter in particular did feature strong economic growth, ultimately recorded at +3.6%, higher than most expectations. There was a subsequent slowdown in part due to Oil hitting $90 a barrel in April. But it did not cause a double dip - it did only last a couple of quarters - and once Oil prices hit bottom at about $70, the yield curve accurately foretold the stronger growth that seems to have come through again at the end.

But instead of unfolding in halves, 2010 unfolded in thirds. Not only did Oil hit $90 in April, but the BP Oil catastrophe in the Gulf, the Euro crisis, and the ending of the $8000 housing credit all hit almost simultaneously, seeming to put the economy back into a tailspin.

What I missed in my preview were (1) the dramatic and immediate impact of the end of a specific and significant government program, and (2) the LEI's didn't do a good job picking up the early harbingers of a currency crisis. All of these above items created a Pavlovian fear of a repeat of 2008's meltdown that froze consumers and employers alike for about three months in mid-year. With strong European political measures, Oil falling back under $70 a barrel, and perhaps more than anything the emotional relief of seeing the capping of the Oil volcano at the bottom of the Gulf of Mexico, there was a palpable sense of relief, and the spigots of spending and to a lesser extent hiring opened again.

Looking ahead to 2011, if you are thinking I could write almost the exact same column again now, you are pretty close to the truth. I'll post that preview shortly.