CEO Q Interview

Part 2: U.S. Economic Outlook 2009 & 2010

What is The US Economic Outlook for 2009?

In general, 2009 will see more economic decline, financial market volatility, and financial shocks and losses. This is caused by the economic cycle correction, speculative and short-term investing, and the global ripple effect.

Jobs will be lost at a rapid pace. Businesses and consumers will reduce their spending. The inventory of homes will rise and the prices of real estate and stocks will fall further. The damage to collective psyche of the investors, consumers and businesses  will be significant and the economy will take time to recover. This vicious downward cycle requires painful socioeconomic actions in order to make the necessary corrections.

Obama’s fiscal stimulus package, bailout and other economic policies can soften the fall, but are unlikely to reverse it anytime soon. We expect to see the bottom fall out around late 2009 or early 2010.

Most analysts tend to underestimate or overestimate the growth and decline cycles. Our analysis indicates that 2009 will have mixed results for different industries, the hardest hits will be in the financial, real estate, auto, retail, construction, furniture, airlines, advertising, and disposable income industries (tourism, gaming, hospitality, and travel). The relatively unaffected or growth industries are the export industries, food, alternative energy, education, new technologies, and healthcare. The general economic decline cycle will bottom in 2009 and we could see stability sometime late 2009 or early 2010, then we will be back to modest recovery in late 2010 or early 2011. However, the real estate, construction and financial industries will bottom in  2010, the recovery could start in 2011.

Jobs

• Jobless rate could hit two digits. This is not counting those who cannot find jobs or who have stopped looking, or those who work part-time or who have received pay cuts. Obama’s job creation plan, through infrastructure investment, can reduce the jobless rate in 2009/2010. However, the cost will result in a larger budget deficit and a negative economic outlook for years to come. While investing in a new infrastructure creates new jobs, these investments do not create new income or self-sustaining jobs. Only new successful businesses can create and sustain jobs.

Real Estate

• The real estate market will hit bottom in 2010. The exact timing and recovery of real estate prices depends, in part, on foreign investments and how strong the government program is in stopping the foreclosures and improving liquidity.

Investments

• The best time to invest will be in 2009 & 2010. The foreclosed Real Estate market and undervalued stocks will offer historical and unheard of investment opportunities. gold and platinum are worth following. New wealth will be created through investing in the right opportunities.

Consumers

• Consumer spending will be reduced. Consumer spending accounts for about 70% of all US economic activities. Loss of home equity and tightening credit could result in an increase of consumer’s bankruptcies. Low oil prices will not last for long. Retailers and discretionary spending industries will suffer.

• Business spending accounts for about 10% of US economic activities. It is not unlikely to see the reduction of capital and operation expenditure by 10-20% or more by the end of the cycle.

• GDP growth will come mainly from government debt spending.

Interest Rates

• The Fed will slash the Interest Rates and maintain rates near zero.

Inflation/Deflation

• Prices will deflate in general mainly for real estate, national products and services. Imported material costs will rise. I'm less worried about the US currency in the short term, but more worried in mid to long term. There is a minor risk of inflation tied to wrong Fed policies. On the other hand, I see asset bubbles and inflation risks for emerging economies by the end of 2010 or early 2011. With global inflation risk on the rise, we could see more socioeconomic troubles and political unrest in economies with thin middle class. 2011-2012 will be challenging for many policy makers in US and the world.

Exports and Trade Deficit

• Export industries and US-based Multinationals will benefit from the decline in the dollar value and will have an edge in competing globally. However, if the government makes more policy mistakes, causing the dollar value to fall significantly, the investors could flee the dollar-dominated investments and this would further hinder the recovery effort.

The 6 key variables in determining the timing and the rate of the recovery are:

1. The effectiveness of the new U.S. economic policies in establishing trust in the US economy,

2. the health of America’s innovation and entrepreneurship engines (financial performance)

3. the global political and security climates,

4. the oil and commodities prices,

5. the dollar exchange rate,

6. the interest rate.

Behavioral finance tells us that these factors are the key elements of the investors and CEOs' confidence that are needed for recovery.

 

About Med Jones Med Jones is the president of International Institute of Management. He is recognized as one of the few experts who predicted the US financial and economic crises of 2008. In January 2007, he challenged the US President's State of the Union Address, Federal Reserve Chairman and world economists. His predictions were the most comprehensive and accurate among the experts who warned about the crisis. The original warnings and predictions can be found at: The institute’s policy white paper: U.S. Economic Risks & Strategies 2007-2017 (June 2006) Warning about the housing bubble, consumer and national debts, trade and investment deficits, currency risks and the cost of wrong foreign policies A press release on PR.com US Heading to an Economic Crisis (February 2007) Warning about the crisis. Reuters Interview: Warning to Wall Street about the real estate bubble, subprime mortgage defaults, bankruptcies, and the loss of confidence in US economy (March 2007) Jones is a non-partisan technocrat. His predictions are followed by Democrats, Republicans, and Independents. He can be reached at medjones.com

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U.S. Economic Outlook 2009 & 2010 Predictions

Economic Policy White Paper

U.S. Economic Crisis
U.S. Economy Recovery Plan