12.29.10

Threats For 2011

Posted in Economics, Financial Markets, Politics and Policy at 9:55 pm

A number of bloggers are making their annual predictions on what’s in store for the economy in the coming year.  Since I consider trying to forecast GDP, unemployment, and other macro measures a year out to be a fool’s errand, I will instead focus on what I consider to be the biggest threats to the US economy in 2011.

  1. Oil Prices. Crude is now over $91/bbl.  That represents a 35% increase over where it stood early this past Summer.  Rising oil prices act as a brake on economic growth.  $100/bbl is an important psychological milestone, and if it goes much above that, we will certainly see an impact on auto sales, airline profits, and transportation industry profits, along with a general falloff in demand as disposable income is reduced.
  2. Real Estate Prices. Housing prices started falling again in July after appearing to stabilize.  It appears that the temporary stabilization was largely a result of the homebuyer tax credit, and its expiration means housing is resuming its slide.  This will mean more negative equity, more foreclosures, and more economic pain for almost everyone.
  3. Stimulus Wind Down. The growth rate of ARRA spending has already peaked.  Many programs are winding down.  There will almost certainly be many (misguided) calls for further austerity.  State budgets are being cut back to the point where basic services like snow removal (as the recent Northeast blizzard demonstrated) are becoming a challenge.  The 2% payroll tax cut and unemployment extension will provide some respite, but these are temporary measures.
  4. The European Debt Situation.  The crisis that is continually contained, until it isn’t.  It’s likely that we’ll continue to see flare ups followed by new emergency measures that bring about temporary calm repeated almost ad infinitum.  My fear is that, for whatever reason, there will eventually be a “European Lehman” that fails and the European authorities will be unwilling or unable to implement a rescue in time.
  5. Policy Paralysis. Politically, there isn’t going to be any further fiscal stimulus.  Conventional monetary policy is at its limit.  Unconventional monetary policy will face widespread opposition from both the left and the right.  We are thus vulnerable to any significant shocks that occur, whatever they may be.

Never forget the old boxing saying that it’s always the punch you didn’t see that knocks you out.