It has begun to dawn on economists that all of the good news about housing, GDP, and earnings much be leading somewhere. Practitioners of the dismal science are beginning to make upward revisions to their forecasts for second half GDP.
A survey by The Wall Street Journal shows that a number of large banks and fund companies are pushing up GDP expectations. A good example is that “T. Rowe Price Group Inc. increased its third-quarter projection to 2.75% from 1.3%.”
There are several reasons why the new projections could be overly optimistic.
Unemployment has long been considered a lagging economic indicator. GDP can rise while employment keeps falling. That may not be the case if joblessness goes above 10% and stays there for more than a quarter or two. The drag on the economy under those circumstances could be great enough to do severe long-term damage to consumer spending, the major engine of GDP growth.
A lack of access to credit could also cause a long period of economic stagnation or another recession. The problems with bank balance sheets are unprecedented and most financial firms are still in the early stages of recovery. They lack motivation to extend credit to businesses and individuals. A “credit less” recovery in nearly impossible because lack of access to capital undermines everything from financing for inventories to credit card availability.
The assumption of most economists is that there will be a small move up in GDP the latter part of this year and an accelerated improvement in 2010. A second recession is just as likely if the jobs and credit markets continue to deteriorate.
Douglas A. McIntyre
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