Wednesday, June 24, 2009
Nobody ever said that a recession was easy; but it looks like the recovery is going to be a little rocky, too. Renewed optimism has brought about increasing mortgage rates and gas prices - both factors have the potential to cripple an economic recovery, as households are thrown back to the economic wolves.
In light of recent economic reports, major banks are revising their outlooks - the World Bank recently downgraded its US GDP growth outlook to -3.0% in 2009 and +1.8% in 2010, while the OECD now expects US GDP growth to register -2.8% in 2009 and +0.9% in 2010. As such, the trajectory for 2010 growth seems to be very much up for debate.
To be sure, without stimulus coming from monetary policy (short term rates are near zero), further declines in home values expected, and a banking system that remains very much in flux, the recovery this time around will likely be much slower than the "V-shaped" recovery that would be expected given the depth of the recession. But who really knows?
Let's take a look at energy
The chart to the left illustrates the Energy Information Administration's (EIA) forecast for crude oil consumption in 2008 presented at the Macroeconomic Advisers Quarterly Meeting in June 2008 (I attended this).
In Q2 2008, the EIA expected overall consumption to grow over the year (which is the demand number of the EIA's World Oil Balance estimates). Driven primarily by China and the developing world, 2008 net global consumption of crude oil was expected to rise by 1 million barrels per day in 2008. Oh, and the forecast for oil prices was somewhere in the range of $120-$130/barrel. But it didn't.
It fell by 0.46 million barrels per year. Here is how the 2008 consumption numbers actually played out (plus revisions to previous years).
The chart above illustrates the actual consumption growth through 2008, as estimated by the EIA. US demand completely retrenched, and China's oil consumption slowed dramatically. Oil prices fell to the floor, and recently, an uptick in
China's global demand has renewed the market for crude.
Now, the US household is faced with rising gas prices...again! And according to a recent Gallup poll, Americans believe that gas prices are going back up to $3.39/gallon (national average is currently $2.69/gallon). Oh, man. Don't worry, the EIA forecasts oil to remain in the $67/barrel price-range, helping to cap gas prices at $2.33/gallon. But we know the EIA's track record...
You know, the one truth in this whole economic mess, is that nobody really knows. I tend to be more optimistic about the outlook, going against the wind that is the "deleveraging" view, which is is bringing down the "consensus" (see Martin Wolfe's chart of the week). Eventually, positive economic news will manifest itself into the economy, driving up demand in the opposite spiral that brought the economy down.
But again, who really knows? All we really have is a long list of banking crises to determine an "average" outcome - please see the research done by Reinhart and Rogoff, this paper in particular - but it's just a average, folks.