Smart Sourcing Summit: Expect "solid" recovery
Comerica economist sees 3.9% GDP growth in 2010
Tom Stundza -- Purchasing, 10/14/2009 2:07:58 PM
The economic recovery from recession will be stronger than many other forecasters are saying, forecasts Dana Johnson, senior vice president and chief economist at Comerica Bank. Speaking at Purchasing's Smart Sourcing Summit this week in Chicago, Johnson projects a 3.9% growth in gross domestic product (GDP) in 2010.
The consensus Blue Chip Economic Indicators forecast for 2010 GDP growth is 2.4%. "I have the view of solid GDP growth ahead in 2010 because the deeper the recession the bigger the bounce back," Johnson says, "and the longer the recession, the more pent-up demand for manufactured products there is out there."
He says that "substantial recovery growth would be twice the previous peak-to-trough recession but that would create an 8% bounce and that's not going to happen." That's why the recovery will be substandard, he says, "despite remarkable improvement already evident in credit markets." So, Johnson forecasts a 3%-3.5% growth bounce back in the third quarter economy and a 2% growth in the fourth quarter. By comparison, GDP declined 6.4% in the first quarter and 0.7% in the second. The third quarter GDP will be announced by the Commerce Department's Bureau of Economic Analysis on Oct. 29.
The bank economist says "that as companies prepared for a 1930s-type depression, they panicked and reduced manpower and operations more than was necessary. Instead, they got a steep recession," he adds, "with the public incurring enormous losses in net worth-a third in real estate and two-thirds in stock market equities." He admits that "the loss of household net worth this year is unprecedented, so keep a close eye on personal savings rate." A continued increase would be a good economic sign.
Commercial real estate credit is still very tight, but other forms are becoming more available so that the housing market, "which was the root of the credit crunch," is stabilizing.
That's why his view is that "the housing market is behaving better than before with more sales, more mortgage money available and improving housing prices as the maximum rate of decline has slowed dramatically. So, building permits and housing starts are up."
On other credit issues, Johnson forecasts that the near-zero federal funds interest rate from the Federal Reserve will continue until unemployment gets better. "The Fed will likely start tightening the money supply around the middle of 2010," he says, "so the federal funds rate will be near 2% by year's end."
In his wide-ranging presentation, Johnson also projects:
- A huge push will be coming from additional government spending next year. Another $300 billion in government stimulus funds will come next year and will boost the economy. This year, only $100 billion is dedicated to stimulus spending-and just 10% of the projects are ‘shovel ready'-so the rest of the $500 billion being spent are transfer payments to various existing programs.
- Jobs growth will show modest growth. The unemployment rate will be around 10% in the fourth quarter of 2009 and first quarter of 2010 and "then it will come down relatively slowly in 2010 to 8-8.5% by the fourth quarter."
- A "noticeably higher stock market" one year from now.
- "Inflation won't really be an issue in 2010-2011" since commodities only account for 3%-4% of value added in U.S. manufacturing. He suggests that commodity prices are "a sensitive and good indicator of global economic activity" so that ongoing industrial activity worldwide will boost commodity prices in 2010. However, "the underlying rate of inflation is 1.5%, half what it was a year ago, because of all the slack in the U.S. economy."
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