Short term economic prediction

Just call me karnack. (sigh – now I wonder how many of you will get that.) I’m still going to give a bit of short-term economic prediction – that is, for the next couple of years. I’m then going to bore you with why I think so. You’ve been warned; this way be boredom. (Not dragons. Dragons are not boring, and they’re thataway instead.)

The quarter that just ended is going to eventually be labeled the end of the recession when the NBER gets around to it. End of recession isn’t rebound, it’s no longer falling and indeed slightly increasing but not what I’d call healthy rebound. Actually it’s going to end up with a +1% (give or take a bit) GDP growth from the previous quarter.

Now before I get a “that’s just because of the cash for clunkers” remark, no. It isn’t. I’d say between a third and half of it was, but there was growth in the other sales areas as well. Further the ISM manufacturer’s index is up and the home sales is up and, well, then there’s my favorite little predictor of end of recessions. Yes, past performance does not guarantee future, but this little gem has been right every single time we’ve tracked it.

Four week average of initial claims for unemployment is an almost obscure little datapoint in the datastream. But there’s this weird fact that if you plot it historically against recessions you discover it peaks – I mean severely and obviously – within a couple of weeks of where the NBER eventually declares “end of recession”. It’s weird because they don’t really look at initial claims, they look at total unemployment (along with some other things). Anyway, initial claims peaked a while back. Blatantly, clearly, without a backward look. Fewer people are becoming unemployed each week than in the previous week. Note this does not mean total unemployment is decreasing. That number is still high and will probably increase through the end of the year.

In other words, fourth quarter is not going to be a clear increase. It is going to look a lot like third quarter – positive instead of negative, but not great.

At this point I could darn near be quoting the OMB or any of several hundred economists, keynesian and misean both. Now the miseans are saying that in January – possibly as early as Thanksgiving of this year – we’re going to see a second plunge. I think I’ll devote a post sometime in the future to all the reasons I no longer give credence to Miseans, but let me put the punchline here. For the past 30 years, every time Misean/Monetarist/Chicago school predictions differed from Keynesian predictions, the Keynesians were right and the Miseans wrong. If I’ve got two predictors and the only time one is right if the other one is but if they differ it’s always the other that’s right then I’m throwing away the useless predictor. That’s not to say keynesians are perfect. But every time they’ve been wrong the miseans have, too. So, I’m going to ignore the miseans.

That said, some keynesians are saying a double dip is possible as well, and that the more likely future through the end of 2010 is a doldrum. That is, a gdp growth of 1-2% and an unemployment that, while it quits climbing early, stays high throughout the year. I need to point out that these keynesians include Orszag and Krugman and DeLong as well as the economists of the OMB.

I disagree. See, I think we’ll see a serious uptick in the economy in the first quarter of 2010 – 2% to 3%, and it’ll be solid growth by the second quarter. I also think we’ll see a more significant downturn to unemployment throughout the year. Since I’m making such a severe prediction I think I need to explain my point. And I’m going to start by returning to Krugman.

See, in addition to the predictions he’s making, he’s also noted that if we pass another and preferably stronger stimulus we’ll see growth. The doldrums assume no significant change to the current liquidity trap. If we can get things rocking we’ll climb out of it. He is pessimistic about passing another stimulus, however.

Me, I’m optimistic about it but that’s because I’m not looking at the same stimulus. I’m looking at that health care reform that’s going on right now.

I think it’s going to pass. Well, SOME version of it is going to pass. It might have a public option (I think it’s about 2:1 right now but i wouldn’t put money on that.) It will, however, have some form of mandate – EVERYONE will have to get some sort of insurance, and the government will provide some sort of means for the people in the middle (too much income for medicaid, not enough for current premium levels) to get theirs. That’s money, dear readers. It is a LOT of money. It is, in short, a stimulus.

Now as I said I also think there’ll be a public option, and I’m going to make a prediction should that pass. You will see a surge in entrepreneurial startups. There are a LOT of people who want to start their own business but who feel trapped because of their current benefits. They can’t afford to do their own. There’ve been a few surveys on the subject, even. Now even with that benefit covered several will find another reason, but it breaks the Big Company benefit. That was breaking anyway as companies passed along more and more of the cost but at least they were getting a better group rate than you got by yourself, but it was still getting worse and worse… yeah, run-on sentence to demonstrate the issue. Benefits will no longer be health benefits. Or rather, I can gamble and still take care of my family? Roll them bones, people.

The thing is, that’s going to be stimulative. Lots and lots of people taking that chance. In addition, a lot of companies are going to be shedding health care plans or negotiating savings on their plans. Count on it – it’s one reason some of the plans have “companies have to keep their plans unless the insurance company gets stupider” clauses. If I can shed 15% of my employee cost without cutting a single employee, I’m doing it. Heck, I’d do it for 5%. That increases profits, and increased profits means I think about hiring another body or two. And that increased profit is an indirect stimulus as well.

Even a bad bill is going to mildly stimulative. If it’s a decent bill (again, I’m estimating that to be probable but not guaranteed) it’ll be significantly stimulative over the subsequent year.

We will see everyone agreeing the recession is over by June of next year.

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