Without further action on monetary and fiscal policy, the economy faces “a lot of downward momentum right now” with an annualized 4% decline in economic output in the fourth quarter and 2% in the first quarter before struggling back to growth. Mr. Meyer, vice chairman of forecasting firm Macroeconomic Advisers, said the unemployment rate would peak at 8% to 8.5% by the end of next year.
What would make it worse? The housing correction could run longer than anticipated, equity prices could decline sharply or credit conditions could continue to deteriorate, Meyer said.
Over the last 10 days “we’ve seen some stabilization in some measures of credit conditions” but little overall improvement, he said. The credit problems also could still lead to more economic troubles.
With housing prices, Mr. Meyer said, “I think the best we can hope for is that we’ll see a deceleration in the rate of decline” with stabilization by end of 2009 and into 2010. So house prices would continue to fall “but at a slower and slower rate.”
Is the Fed out of ammunition to stimulate the economy? he was asked. “There’s room between 1% and zero. I think we can say with confidence that the Fed isn’t out of room,” Mr. Meyer joked.
He expects the Fed to cut its interest rate target by half a percentage point, to 0.5%, perhaps at its December meeting. “The question that we struggle with is zero or half percent for an extended period of time.” The Fed also will roll out “nonconventional policy options” by managing expectations and purchasing longer-term Treasurys to push down longer-term interest rates, which are more important to influencing the economy than short-term rates. (The Fed’s problem earlier this decade was not being too low for too long, he said, but that the central bank didn’t raise rates in an “aggressive enough fashion.” Federal Open Market Committee members will be mindful of that, he said, but the economic weakness and rising unemployment rate into 2010 may keep the Fed from tightening policy.)
“If you want to know what members of the FOMC are saying around that table, they’re praying a lot for fiscal policy,” Mr. Meyer said. “It’s really difficult to get timely fiscal policy, but we really need it now.”
Mr. Meyer’s criteria for fiscal stimulus echoed those of former Treasury Secretary Lawrence Summers: it needs to come by early next year, be substantial (around $300 billion to $400 billion) and have a sustained impact for two to three years.
Direct rebates to consumers should be avoided because they’d be short-lived with a shallow effect on the economy. “Politically it might feel good but economically it isn’t very effective,” he said. Among his guidance: Tax cuts implemented through lower tax-withholding rates would be a start. Government spending programs have the “most powerful” economic effect because unemployment benefits and food stamps are spent entirely. Infrastructure spending may ramp up slowly, but the sustained support for the economy over several years would be useful, he said.
“We’re not talking about an ordinary recession,” Mr. Meyer said. “We’re talking about something which is very severe and arguably could be the worst downturn since the Great Depression. … We simply can’t be constrained in the short run by the budget deficit. We’ve got to do what we’ve got to do.” Rebecca here. My firm subscribes to Macroceconomic Advisors, Laurence Meyer is the Vice Chairman and Director, and their forecast has obviously changed substantially since just November 7, 2008.
In this article, Meyers states:
- Q4 2008 growth will be -4% q/q annualized
- Q1 2009 growth will be -2% q/q annualized
- Unemployment will peak at 8% to 8.5%
And on November 7 - just 11 days ago - Macroadvisers (Meyers) forecasted:
- Q4 2008 growth will be -3.8% q/q annualized
- Q1 2009 growth will be -0.4% q/q annualized
- Unemployment will peak at 7.6% in Q3 2009
There is no economic constant in this environment. Forecasts are changing by the minute.Rebecca Wilder