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Money Talks

By Dr. Gregg Dimkoff
Professor, Grand Valley State University
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As meteorologists sometimes say, when a butterfly in Brazil sneezes, it sets off a thunderstorm in Texas. The metaphor is highly unlikely, of course, but emphasizes the impact small, random events can produce. It’s the same with predicting how the U.S. economy will perform in 2011. We know that a random sneeze can ruin the projection. As a consequence, it’s important to recognize that no one knows how the economy will perform this year. Instead, we look at trends, try to make educated guesses about where the butterflies are and how many of them are suffering from allergies, and then make a stab.

The National Association of Business Economists, a group of 46 professional economists, tries to arrive at a consensus about economic conditions by periodically surveying its members. At this time a year ago, the NABE predicted 2010 would see GDP growth of 3.2 percent. No one expects the association’s projections will be dead-on accurate, but we do expect it to be in the ballpark, and it looks like it will be. As of mid-November, it was on track to be 2.6 percent, a little lower than the projection, but as close as may be possible. We’ll know 2010’s actual growth rate in early 2011.

The association’s projection for the year 2011 is the same as the current growth expectation: 2.6 percent. If that projection turns out to be accurate, it means continued modest growth, and that’s okay in most years. What’s not okay is that GDP growth is often much stronger during the first one to two years after a recession has ended. A hallmark of this recovery is the economy’s slow recovery, and that’s quite unlike previous recessions. Economists no doubt will argue for years why that’s the case. The usual culprits will get the blame — trying to spend our way out of a recession, low business investment, a housing industry still in a depression, political and regulatory uncertainty, an anti-business climate in Washington, an us-against-them mentality in Congress and unimaginable levels of debt.

Nevertheless, here’s what another year of modest economic growth will accomplish. The nation’s unemployment rate will fall slowly. We’ll be lucky if it falls much below 9 percent from its current 9.6 percent level. In order for the rate to fall, the economy must create more than 100,000 jobs each month, the number of new workers entering the workforce each month. During the last few months of 2010, the nation’s unemployment rate didn’t budge. As the economy continues its slow crawl back from the abyss, however, the rate of new job creation will eventually outpace the number of new job seekers, slowly lowering the unemployment rate.

It isn’t obvious that the real estate market has bottomed out. The number of houses in foreclosure is still increasing, meaning there will continue to be a large supply of vacant houses available to first-time buyers. The over-supply of vacant houses will act as a damper on new home construction for at least all of 2011. Some housing industry experts say it will be 2012 before new construction ramps up, but the vacant house overhang is so large, that prediction might be just a pipe dream.

The future looks a little brighter for Michigan, if for no other reason than the state was hit so hard during the recession, even relatively small increases in business activity represent a large rate of improvement. The auto industry will continue to grow. At the depths of the recession, U.S. auto sales were less than an annual rate of 10 million units. The corresponding number for 2010 will be around 11.5 million units, and projections for 2011 are for more than 12.5 million. Since vehicle sales still have a major impact on Michigan, the state’s economy will continue to grow and create more jobs. Michigan’s unemployment rate peaked at 14.5 percent in December 2009, and has fallen slowly to under 13 percent, even while the national rate is only one-half percent below its October 2009 peak. Expect that trend to continue. If this year’s exceptionally high grain prices hold through next year, Michigan’s agriculture industry also will experience a boom.

Unfortunately, there will be lots of butterflies this year. Interest rates will be a little higher, but not enough to have a major impact on most businesses or individual investors. In short, 2011 will look much like 2010: There are no miracles about to happen, but there should be continued recovery at a moderate pace.

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