Markets in 2009, the Role of Fiscal Policy
MPSIF: Educated Investing
Carlos Amaya, Sobby Arora, Oliver Brassard and John Brouillard
Issue date: 3/10/09 Section: Voices
The MPSIF Economic Strategy team maintains a particularly negative outlook for the US economy. Our view differs from those analysts surveyed by Bloomberg as they are fairly optimistic on the state of the US economy, seeing a pick-up in growth by the third quarter of 2009. Unlike the consensus view, the Economic Strategy team believes that the market should continue to deteriorate in 2009 as the macroeconomic headwinds facing the economy will worsen before they get better. Several reasons support our view:
First, private consumption's negative growth trajectory (-3.8% Q308 and -3.5% Q408) is unlikely to reverse soon. This has dramatic consequences for the US economy as historically, consumers have represented 2/3 of GDP. A recovery path is unlikely for a variety of reasons. On the income side, labor market indicators continue to be soft as unemployment rose to 7.6% and disposable income continued its decline. Wealth factors also continue to weigh down on consumption as households' main assets (homes and stocks) suffered dramatic falls during the last year. Finally, consumption has been hampered by lower credit availability (rationing, tighter standards and disappearance of home equity withdrawals). Sluggish consumer spending is already being reflected in an increase in the savings rate which should continue to rise to compensate for the excess borrowing that characterized the 2000-2007 period.
Second, despite better corporate health in comparison to prior recessions, private investment is unlikely to pick-up some of the slack and is already falling considerably (-20% 4Q08). With profits expected to fall (13.3% projection by S&P), uncertainty in the economic environment and limited credit availability, firms will most likely cut back significantly on their capital expenditures and continue their reduction of inventories.
Third, the housing recession continues without a clear bottoming and therefore residential investment (down 23.6%) will continue to contract economic activity. The two main catalysts necessary for home buying, credit from the banks and a consumer willing to make big ticket purchases, are both in tight supply. The Treasury has been buying Fannie and Freddie paper to lower mortgage rates and the home builders are offering teaser rates to prospective buyers. A bottom still seems far as nine months housing inventory remains in the market, whereas a six month's supply is usually considered normal.
First, private consumption's negative growth trajectory (-3.8% Q308 and -3.5% Q408) is unlikely to reverse soon. This has dramatic consequences for the US economy as historically, consumers have represented 2/3 of GDP. A recovery path is unlikely for a variety of reasons. On the income side, labor market indicators continue to be soft as unemployment rose to 7.6% and disposable income continued its decline. Wealth factors also continue to weigh down on consumption as households' main assets (homes and stocks) suffered dramatic falls during the last year. Finally, consumption has been hampered by lower credit availability (rationing, tighter standards and disappearance of home equity withdrawals). Sluggish consumer spending is already being reflected in an increase in the savings rate which should continue to rise to compensate for the excess borrowing that characterized the 2000-2007 period.
Second, despite better corporate health in comparison to prior recessions, private investment is unlikely to pick-up some of the slack and is already falling considerably (-20% 4Q08). With profits expected to fall (13.3% projection by S&P), uncertainty in the economic environment and limited credit availability, firms will most likely cut back significantly on their capital expenditures and continue their reduction of inventories.
Third, the housing recession continues without a clear bottoming and therefore residential investment (down 23.6%) will continue to contract economic activity. The two main catalysts necessary for home buying, credit from the banks and a consumer willing to make big ticket purchases, are both in tight supply. The Treasury has been buying Fannie and Freddie paper to lower mortgage rates and the home builders are offering teaser rates to prospective buyers. A bottom still seems far as nine months housing inventory remains in the market, whereas a six month's supply is usually considered normal.
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