The Vote That Recession Is Ending Grows

The National Association of Business Economists has just released its prediction for the direction that the economy will take between now and the end of the year. The survey polled 45 well-known experts.

Nearly 75% of those who responded to the survey said that the recession will end next quarter. Not a single economist thought that the recession would move beyond the first quarter of 2010.

Hailing a recovery may be a little premature. Several things could happen in the next quarter and each one could contribute to a continuing contraction of GDP.

Oil prices may still go up much further. Some OPEC members say that they expect oil to be over $70 by the end of the year. Exploration and production of crude is demonstrably down. A prolonged period of low oil prices took away the incentives for spending money to increase supply.

China is using more crude than it did in the last quarter of 2008 and the first quarter of this year. There are two theories as to why that is true. One is that the economy in the world’s most populous nation is improving more sharply than expected. The other is that the country is increasing its strategic oil reserves in case of a supply interruption. Oil prices would also rise if there are credible forecasts that the upcoming winter will be unusually cold in the northern hemisphere.

In general high oil prices mean less disposable consumer and business spending which is not conducive to rising GDP.

There are a number of experts who believe that the recession will have “two dips.”  The first is ending now. The next will begin in early 2010 caused by tepid consumer spending, unemployment which stays above 9%, and a continuing drop in corporate profits.

The most powerful case that the recession may continue is that banks are continuing to choke off credit to consumers and small businesses. Despite improving balance sheets financial firms do not want to risk another wave of losses due to defaults on credit cards and revolving credit lines for businesses which still face trouble because of the slowdown in manufacturing and retailing.

A third quarter recovery is not likely. And, the economy could actually get worse early next year.

Douglas A. McIntyre