The Campaign Spot

Can We Count on a Stronger Economy in 2010?

Remember Obama’s budget, with those strangely optimistic projections about how the economy will perform after this year?

After contracting at a 1.2% rate in 2009, a more modest drop than the Congressional Budget Office and Blue Chip Consensus forecasts assume, the White House sees growth domestic product growth snapping back by 3.2% next year and then 4% or higher the three years after that.

I realize Nouriel Roubini, a professor at New York University’s Stern School of Business, is nicknamed “Dr. Doom” for a reason. But his pessimism has been pretty accurate lately. And he sees a much, much grimmer 2010 outlook:

. . . With the U.S. and global economy in a massive slump, and with deflationary forces at work, it is hard to believe that a massive economic recovery will occur in 2010, thus lifting earnings sharply. Even in a U-shaped scenario, U.S. growth in 2010 would be 1% or lower, and Eurozone and Japanese growth would be close to 0%. With weak growth, deflationary pressure would still be lingering, putting pressure on profits, the pricing power of firms and, thus, profit margins. So even in a U-shaped scenario, a rapid rally of equities is highly unlikely.

It is true that equity prices are forward-looking; they usually tend to bottom out six to nine months before the end of a recession, as they see–ahead of the curve–the light at the end of the tunnel. So the optimists seeing a recovery of growth in the second half of 2009 argue that equities should start to rally on a sustained basis now. But this severe U-shaped recession in the U.S. may not be over at the 24th month date (December 2009). Most likely, the unemployment rate will rise throughout 2010 well above 10%, and the growth rate will be so weak (1% or closer to 0%) that we will remain in a technical recession for most of 2010 (36 months if the recession is over only in December 2010). Thus, the bottom of the stock market may occur in late 2009, at the earliest, or possibly some time in 2010.

I mention this because tax revenues in a year with 0 to 1 percent GDP growth will be pretty darn low – and make the projected budget deficit much, much larger than expected . . .


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