Forecasters see economy turning positive in second half of 2009

Economy-watchers anticipated poor performance from the economy in the first quarter of 2009, and they got what they expected when the Bureau of Economic Analysis released the advance report on Gross Domestic Product (GDP). GDP was down by an additional 6.1 percent in the first quarter, after plummeting 6.3 percent in the fourth quarter of last year (quarterly GDP changes are annualized and adjusted for inflation). The consensus view among economists is that one more negative quarter lies ahead, although the decline in Q2 will be a more modest decrease of 2 to 3 percent. But once the economy gets past these three quarters of carnage, analysts look for growth as measured by GDP to turn positive in the second half of 2009. The Round Number Forecast from the W. P. Carey School of Business is projecting that GDP will decrease by 3.0 percent for all of 2009 and increase by 2.0 percent next year (Updated May 7, 2009).

Economy-watchers anticipated poor performance from the economy in the first quarter of 2009, and they got what they expected when the Bureau of Economic Analysis released the advance report on Gross Domestic Product (GDP). GDP was down by an additional 6.1 percent in the first quarter, after plummeting 6.3 percent in the fourth quarter of last year (quarterly GDP changes are annualized and adjusted for inflation).

The consensus view among economists is that one more negative quarter lies ahead, although the decline in Q2 will be a (relatively) modest decrease of 2 to 3 percent. But once the economy gets past these three quarters of carnage, analysts look for growth as measured by GDP to turn positive in the second half of 2009.

Among the 50 forecasters that contribute to the national consensus reported by Blue Chip Economic Indicators (April 10, Aspen Publishers), 92 percent believe that the recession will be over by the end of 2009, followed by growth of GDP in 2010. The Round Number Forecast from the W. P. Carey School of Business is projecting that GDP will decrease by 3.0 percent for all of 2009 and increase by 2.0 percent next year (See table at Economy@W. P. Carey).

In spite of rock-bottom consumer confidence, falling home prices, and rising unemployment, consumer spending rose by 2.2 percent in the first quarter. It is doubtful this increase will be sustained. Analysts look for consumer spending to dip again in Q2, in spite of the boost to disposable income from the stimulus program.

Offsetting forces include sharp reductions in consumer borrowing and increases in the savings rate from near zero a year ago to over 4.0 percent now. Consumer confidence is unlikely to improve markedly until headlines from labor markets take on a more positive tone. Monthly nonfarm job losses averaged 685,000 in the first three months of the year, with total job losses exceeding 2 million already for 2009.

Even with positive GDP growth later in the year, increases in the number of jobs lost and total unemployed workers will continue past year end. In the latest report from the Bureau of Labor Statistics, 47 states were losing jobs on an over-the-year comparison in March. Only Alaska, Louisiana, and North Dakota are adding jobs. Unemployment nationally is expected to remain at a high level (perhaps 10 percent or more) through 2010.

The W. P. Carey forecast projects that both residential and nonresidential building will decrease sharply again in Q2. Spending on residential structures will bottom out in the second half of 2009, but nonresidential will decline each quarter into 2010. After contributing to GDP growth during the first year of the recession, exports are projected to be down by 15 percent this year, with minimal hope for recovery in 2010.

The recession is global in scope, and several trading partners are harder hit than the United States. Japan's GDP will fall by more than 5 percent this year, and South Korea may fare as poorly. The United Kingdom and Germany will likely decline by 3.0 percent or more. China grew by 9.0 percent in 2008, but GDP will be up by a relatively meager 6 to 7 percent in 2009.

Although revised Q1 figures on GDP will be released on May 29, the first quarter is over in "real time." We are now well into the second quarter, and analysts are watching for signs of bottoming out. A case in point is initial unemployment claims, which have decreased from a peak of 674,000 at the end of March. A continuing decline in weekly initial claims would be a welcome sign of the "green shoots" that Fed Chairman Ben Bernanke has been looking for in recent speeches.