No more stimulus, please, we're capitalists.
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That’s the view, at least, of the majority of economists surveyed in msnbc.com’s year-end roundtable. Though unemployment will remain stubbornly high, and the economic recovery sluggish in 2010, the government doesn’t need to provide another round of stimulus spending to keep the economy afloat, they say.
The House last week narrowly approved a $155 billion “jobs” bill that includes nearly $50 billion in infrastructure spending and $79 billion for expanding benefits like unemployment insurance and Medicaid. But most of the forecasters in our panel are against the idea of another government stimulus package.
“The time to short-circuit the negative feedback from job losses is behind us,” said Ed Leamer is director of the UCLA Anderson Forecast. “Let the private sector heal the economy.”
Many feel the $787 billion package of tax cuts and new spending enacted in February spurred the rebound in the second half of this year. As the impact of that stimulus wears off, the expectation is that private spending by consumers and businesses will create enough demand to take up the slack.
“You have a floor (on growth) that comes from the fact that there’s an awful lot of latent demand out there that will slowly be tapped into,” said Joel Naroff at Naroff Economic Advisors.
The consensus of msnbc.com’s forecasters is that while growth will fade a bit next year, the economy will continue to expand at a slow but steady pace. After a 3.3 percent increase for the second half of 2009, gross domestic product growth is expected to slow to 2.6 percent for all of 2010, picking up a bit to 2.8 percent in 2011.
“Although the risk of a double-dip recession is still significant, it is not the most likely scenario,” said Diane Swonk, chief economist at Mesirow Financial. “Moreover, there are no silver bullets when it comes to fueling employment. I think our efforts would prove better if focused on improving the health of the credit market, most notably banks, as they are now the only game in town for many consumers and small businesses.”
Two members of the panel, Goldman Sachs chief economist Jan Hatzius and Ethan Harris, head of North American economics for Bank of America Merrill Lynch, support the idea of another round of government stimulus. Harris thinks the package should be “targeted to the housing or the job market.”
Given the dismal job market and high levels of unemployment, there’s widespread support in Congress for an extension of unemployment benefits through the first half of 2010. But there’s less agreement over proposals to give the economy another shot in the arm with a new spending package aimed at creating jobs.
The White House favors a targeted approach including a tax credit for small businesses that create new jobs. The House bill, which has not been taken up by the Senate, includes a grab bag of measures designed to keep the economy moving, including another $27.5 billion for highway construction projects and $8.4 billion for transit systems. Though much of the original $787 billion in stimulus remains to be spent, budget analysts estimate the positive economic impact of that measure will begin to fade by the second half of 2010.
The House bill would also help slow the pace of layoffs by cash-strapped state and local governments that are struggling to close budget gaps after a drop in property and income taxes. The bill would give states $23 billion to pay 250,000 teachers and repair school buildings, and $1.2 billion to pay for 5,500 police officers. They'd also get $23.5 billion to help pay their share of the federal Medicaid healthcare program for the poor.
Small businesses have had a hard time borrowing the money they need to expand output and hire more workers. To keep credit flowing, the Federal Reserve is expected to keep interest rates low, although not as low as the 0 to 0.25 percent range consumers and businesses have enjoyed since last December.
Our forecasters see the Fed nudging them slightly higher, to 1 percent as measured by the federal funds rate, by the end of next year. None of them see inflation presenting a problem for Fed policymakers; the consensus inflation forecast, as measured by the core Consumer Price Index, is just 1.5 percent by the end of next year.
In their overall forecast, the msnbc.com panel sees slow but steady economic growth in 2010. But it won’t feel like a recovery for the millions of Americans who will remain unemployed, according to the roundtable.
The forecasters are not upbeat about the outlook for the job market next year. Though the latest employment data point to the end of a nasty cycle of job cuts, next year’s recovery is not expected to make much of a dent in the unemployment rate, which is hovering around 10 percent. The consensus is that the jobless rate drops by just two-tenths of a percent, to 9.8 percent, by the end of next year.
Recent economic data support the idea that the economy rebounded convincingly at the end of the year. Earlier this week, the Fed reported that industrial production rose by 0.8 percent in November. That’s a sign that businesses are beginning to rebuild their inventories after slashing them to the bone after the recession tightened its grip last year.
Exporters are also getting a continued lift form the weak dollar, which makes their products more competitive in overseas markets. Nariman Behravesh, chief economist at IHS Global Insight, expects industrial production to grow by a 3 to 5 percent annual rate next year.
The housing market also is showing signs of life after a historic collapse that dragged the broader economy down with it. Housing starts rose by 8.9 percent in November, and building permits, an indicator of future growth, rose by 6 percent.
The outlook is not as bright for the commercial real estate market, which is still on the way down. Construction is expected to continue falling next year, by 5.6 percent, before rebounding in 2011, according to Global Insight. A credit crunch also looms over owners of commercial property as they try to refinance trillions of dollars in loans extended during the mid-decade boom.
Continued recovery will depend on a number of forces — credit, consumer demand, job creation, business investment — all moving in the same direction. For now, say economists, those gears appear to be turning again. But the recovery is fragile and is expected to remain weak through next year.
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