Forecast For 2010: Slow Growth With A Chance Of Stagflation

Economists are projecting very slow growth in 2010, with the possibility of stagflation. Recently, the GDP for the third quarter of 2009 was revised downward to a 2.2% …

Economists are projecting very slow growth in 2010, with the possibility of stagflation. Recently, the GDP for the third quarter of 2009 was revised downward to a 2.2% gain, lower than the original estimate of 2.8%. See the following article from Money Morning for more on this. 

The U.S. economy expanded at a slower rate than expected in the third quarter, but reductions in corporate spending and inventories have set the stage for continued growth of gross domestic product (GDP) in 2010.

GDP, a broad measure of economic activity, rose at a 2.2% annual rate from July through September, the Commerce Department reported yesterday (Tuesday), compared to a 2.8% gain in its previous estimate.

The new figure was below the 2.8% median estimate of 73 economists in a Bloomberg News survey, and significantly below the government’s initial estimate of 3.5%.  The GDP report is the third and final for the quarter.

But encouraging data reported earlier this month indicates that GDP should grow by more in the final three months of the year. U.S. retail sales surged more than expected and consumer confidence increased for the first time in three months in November.

While most analysts were disappointed with the size of the revision, others took heart from the reduction in stockpiles.

“The one forward-looking aspect of the release was the inventory drawdown, (increasing) potential for more of a fourth quarter rebuild to support GDP.

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Overall, soft for the first ‘recovery’ quarter, but it further supports the upside potential for the fourth quarter,” Ian Lyngen of CRT Capital Group LLC told The Wall Street Journal.

The increase in consumer spending – which accounts for about 70% of all economic activity – combined with the drop in inventories should stimulate companies to increase production and keep the economy growing in 2010. At the same time, surging corporate investments should sustain further expansion.

“We are really starting to see the mechanisms for a sustained recovery come into place,”  Robert Dye, a senior economist at PNC Financial Services (NYSE: PNC) told Bloomberg. “We are starting to see investment numbers come back.”

Economists surveyed by Bloomberg project the economy to expand at a 3% annual rate from October through December.  But economists at Credit Suisse Group AG (NYSE ADR: CS) and JPMorgan Chase & Co. (NYSE: JPM) in New York raised their projections from 3.5% to 4.5% as exports surged and inventories began to grow in October.

The report also showed third-quarter corporate earnings increased by 10.8%, slightly higher than the 10.6% initial estimate, and the biggest gain in more than five years.

As companies have slashed headcount, they have squeezed more productivity – or output per employee per hour – out of existing workers, boosting their earnings.

Still, the economy shrank 3.8% in the 12 months ending in June, the worst performance in 70 years. When the economy recorded a 0.7% drop in the second quarter, it marked the fourth-consecutive decrease, making it the longest period of quarterly declines since records began in 1947.

The unemployment rate last month fell to 10%, down from a 26-year high of 10.2% in October. Most economists are forecasting the jobless rate to remain above 10% through the first half of next year. The economy has lost 7.2 million jobs since the recession began in December 2007.

And as Money Morning reported recently, many analysts think the U.S. economy will struggle to maintain that momentum in 2010.

Forecasts from Standard & Poor’s Inc. and Goldman Sachs Group Inc. (NYSE: GS) support this outlook. S&P recently projected average GDP growth of 1.6% for all of 2010, while top Goldman economists expect to see the U.S. growth rate decline from 3% early in the year to 1.75% by the fourth quarter.

Money Morning Chief Investment Strategist Keith Fitz-Gerald predicts the U.S. economy “will be lucky to do 2.0%” next year.

“The economy faces some very difficult challenges. There’s a slight chance – depending on what happens with some outside factors – the U.S. could do 2.5%, but I really doubt it,” he said.

In fact, recent research shows the economy could be facing a rare combination of surging inflation, artificially low interest rates, and a jobless recovery – setting the stage for stagflation, an unpleasant economic malaise not seen in 40 years.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.

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