John Mitchell's Economic Forecast - Is It Going to Stop?

I had the opportunity to hear John Mitchell’s economic forecast at the October 19th Commercial Association of Broker's breakfast meeting.  John always does an excellent job making a boring topic interesting.  There were no surprises in his presentation about the current economic situation, the gist of which was, the U.S. economy is growing, albeit at a slower rate than one would hope.

John began with a quick review of where we are:

• In the 4th year of economic expansion (hard to believe that's true but it is)
• 4.5 million jobs below our January 2008 peak
• 4.3 million jobs above our February 2010 trough
• 73 days until the Fiscal Cliff (read my previous post if you want a quick primer on the Fiscal Cliff)
• Globally experiencing economic weakness - Europe, Brazil, China, Russia, India are all either in recession or their economies are slowing down
• In the fourth year with short term interest rates at zero
• The Congressional Budget Office and the International Monetary Fund are both warning of a U.S. recession looming within the next several months

But I didn’t go to hear John Mitchell talk about our current economic situation. I went there to hear what he thinks will happen going forward. Accurately forecasting future economic trends splits the men from the boys, which reminds me of the Yogi Berra quote: “It’s tough to make predictions especially about the future.”

Not surprisingly, John Mitchell didn’t go out on a limb making any bold predictions about our economic future. Economists as a rule are not known for being risk takers. John Mitchell believes that our economy will continue to sputter along in the 2% growth range and that inflation will stay in check at about 2% for the foreseeable future as long as the Fiscal Cliff is handled responsibly.  

What was disconcerting to me was how negative his overall presentation was.  John by nature is an optimist.  He is always looking for a "silver lining." Normally if he says something pessimistic he tries to sugarcoat it with some positive news.  That was not the case this time.  My notes are filled with downbeat statistics.  The big three downers were:

• The economic recovery is growing at an historically slow rate when compared to all other economic expansions since WWII. 
• The Fiscal Cliff.  Congress and the president need to work together to avoid an economic crisis of their own making.  If not handled properly it will throw the U.S. economy into a recession.
• Monetary Policy.  The Federal Reserve is out solutions and nothing has worked.  Interest rates are at historic lows, Operation Twist, and Quantitative Easing have had only modest impact on the economy.  

When he got done, I had to fight the urge to give him a big hug and tell him things will get better. 

Whether that is true or not will depend in large part on who we elect in November.  I hold out no hope if President Obama is re-elected for another four years.  I'm not sure he even acknowledges that we have a serious debt crisis that will take us down the same path that Europe is traveling if we don't do something about it soon.  Mitt Romney talks a good game.  He at least says the right things but I'm skeptical he will have the courage to make the hard choices to get us back on track.  Is he a statesman or just another politican saying whatever is necessary to get himself elected?  I'm sure I've just offended both the Democrats and Republicans that read my blog.  Sorry.  I consider myself an equal opportunity offender.    

Fiscal Cliff Ahead: What it May Mean

Over the past few weeks I've been hearing the term "fiscal cliff" by the TV talking heads.  Some do a better job explaining what they are referring to than others.  So if you're confused or unsure of what they are referring to listen up. 

"Fiscal cliff" is the term used to describe a series of laws that are all expiring at the end of 2012 or are being implemented at the very beginning of 2013 that will have a dramatic adverse impact on the U.S. economy.  Among the laws set to change are:

• The end of last year's temporary 2% payroll tax cut and extended unemployment benefits
• The end of specific tax breaks for businesses
• The end of the Bush era tax cuts
• The start of new taxes related to Obamacare
• The automatic spending cuts resulting from the supercommittee not agreeing to a compromise budget deal 

Without congressional action, up to $600 billion of expiring tax cuts, new taxes and automatic spending cuts are set to take effect.  Some experts predict that if these tax hikes and spending cuts happen all at once the economy would experience a significant slow down throwing the U.S. economy back into a recession.  So the threat to our economy is very real.  

So what is the likelihood that Congress and the president will act responsibly and come up with an acceptable compromise to all parties?  So far Republicans and Democrats in Congress have shown little sign of agreeing on anything except that the other side is to blame for their failure to compromise.  I see four possible scenarios:

Scenario 1: Delay

A likely scenario is that Congress and the president agree to push the issue into 2013 after the presidential inauguration and the new Congress arrives.  If that happens, the tax cuts would continue, the tax increases won't take affect, and the spending cuts will be delayed.  The big problem with this scenario is postponing these difficult decisions continues market uncertainty.  This puts the business community on hold, delaying investments in capital expenditures and the hiring of additional employees.  I think this is more likely if Romney wins in November. 

Scenario 2: Modest Compromise

The lame duck Congress and the president reach compromises on some tax and spending decisions.  I see a scenario where both Republicans and Democrats cave completely on the automatic spending cuts to defense and domestic spending.  I believe this scenario is more likely if Obama wins the election. 

Scenario 3: Over the Cliff

Congress and President Obama fail to reach any compromise whatsoever resulting in the economy going over the cliff into the abyss below.  I would hope that there are reasonable politicians from both parties that could see that this scenario is not in anyone's best interest. 

Scenario 4: The Grand Bargain

In this scenario, Congress and the president reach a comprehensive deal addressing tax, spending and fiscal issues.  The new agreement not only answers the immediate issues facing the country but the agreement also tackles these major issues for the next 5 to 10 years.  Unfortunately I think you have to live in la-la land to believe this scenario. 

So which scenario is most likely?  It's anyone's guess and certainly there could be other scenarios not presented.  I'm personally very discouraged with the lack of leadership in Washington from both sides of the isle.  And yet the alternative of doing nothing is so potentially cataclysmic that I have to believe that even this Congress will do something.  They just have to.  My vote is for Scenario 1.  Any bets?  

Sources: Fiscal cliff ahead: What it may mean, Fidelity Investments, June 28, 2012; Give us a brake, The Economist, October 6, 2012; What is the Fiscal Cliff?, Thomas Kenny, About.com.