Stratfor is not always spot-on, for example, this piece of wishful thinking half a year ago ...
stratfor.com
U.S. Recession Over Before It Began
14 November 2001
Summary
Northern Alliance troops poured into the Afghan capital of Kabul Nov. 13, igniting optimism that the war against the Taliban will end quickly and the U.S. economy can get back to making money. But despite the conventional wisdom that the United States is close to or in a recession, evidence shows that a major recovery is already underway.
Analysis
Since the Sept. 11 attacks, the U.S. media has popularized the notion that the country is in or on the brink of recession. Such hysteria is somewhat understandable, given that the destruction of the world's largest commercial space, the temporary suspension of much of the U.S. transportation network and the evisceration of consumer and business confidence have had a very real economic impact.
But the situation is not nearly as dire as the public has been led to believe. Although many of the most optimistic pundits pegged a U.S. recovery to next year, close scrutiny of the numbers shows the so-called "recession" is over. The economy is already in the midst of a major recovery this quarter, with continued strong growth to occur in 2002.
U.S. gross domestic product contracted only 0.4 percent in the third quarter this year, far less than what many, including STRATFOR, were expecting. When the depth of the terrorist attacks and the relative strength of the GDP figure are compared, it becomes apparent that the United States was well into a robust recovery before the strikes.
This illuminates an important point that has been overlooked in recent economic discourse, which is that the Sept. 11 attacks happened at the bottom of America's economic cycle. The United States had already learned its lessons from the bursting of the tech bubble. Projects of questionable quality had already crumpled, and unsound business plans had been culled.
The attacks would have had a greater impact if they had occurred a year earlier when the economy was more closely centered around shaky technology firms and dot-coms. But the economy had already cut out the fat, so to speak, by the time Sept. 11 came around. This means the rebound will be much faster and sharper than expected.
The Federal Reserve Board has cut interest rates 10 times since New Year's Day and has made it eminently clear that at least one more cut is on deck. The Fed's actions have made interest rates negative, as inflation is at 2.8 percent and the real interest rate is at 2 percent. The federal stimulus package, likely to be worth $67 billion to $75 billion, is also moving its way through Congress. Federal emergency stimulus measures altogether will be in the $100 billion range.
The personal incomes of Americans are stable as well. The dollar has recovered to pre-Sept. 11 levels versus both the euro and yen, and it is preserving Americans' purchasing power. Just as important, the Dow Jones, Nasdaq and Standard & Poor's 500 indices have all recovered to their values before the attack as well, averting fears of an erosion of personal assets.
The massive drawdown on the values of retirement funds and personal assets that was earlier feared has not materialized. Consumer confidence, while weaker, also has not fallen as predicted. According to the University of Michigan's widely respected confidence survey, U.S. confidence actually rose in October despite the anthrax scare. And as energy costs continue to drop -- natural gas prices fell by a record 6 percent in October and gasoline is down 21 percent -- Americans will have more money to spend.
Joblessness has shot up alarmingly but certainly not to the degree expected. American unemployment is at a four-year high of 5.4 percent, but it is still below the 6 percent threshold American economists felt was natural during the past 40 years. It should be remembered as well that unemployment has always been a lagging indicator of economic strength, never a leading one.
Unemployment will probably tick up a bit more, but there are already indications that the worst is over. Initial jobless claims the week of Oct. 29 fell to 450,000, the lowest since Sept. 11. The markets had braced for an increase to 500,000.
A much better measure of the economy's future than unemployment is the state of Americans' finances and propensity to spend. And the best indicator of that is the housing market, since a home is typically the largest purchase most people make.
The Commerce Department reports that sales of new homes in October fell 1.4 percent to a seasonally adjusted annual rate of 864,000 units. Although certainly a decline from this spring's red-hot market, it is far above most economists' forecasts.
Near all-time low mortgage rates of 6.5 percent have triggered a record surge in mortgage refinancing. Refinancing allows borrowers to lock in lower rates, saving tens of thousands of dollars in mortgage payments over the duration of their loans. That frees up income they can use to spend. Fannie Mae, the country's largest mortgage firm, estimates that the current spate of refinancing will pump an extra $50 billion in consumer spending into the economy this year alone.
Not only does this flood of refinancing boost personal spending capacity, it also puts banks on sounder footing. Banks generally perceive mortgages as solid, predictable, free income. Doug Duncan, chief economist for the Mortgage Bankers Association of America, expects a total of $1 trillion in refinancing this year.
All this fresh business will bolster the long-term bottom line of American banks for decades. That extra income, combined with the Fed's efforts to maintain a wide credit window, should provide banks with the confidence they need to extend more credit to others.
The estimates of $50 billion in additional consumer spending and $1 trillion in refinancing are probably both lowball numbers. Not only were both calls made before the last Fed interest rate cut, they preceded the Treasury Department's Oct. 31 decision to cancel 30-year bond issues.
Such bonds are the preferred investment tool for pension funds and creditors with long-term security interests. With the 30-year bonds gone the $17.7 trillion locked into that market will begin trickling into other niches within the debt market.
This glut of creditor cash should push down corporate borrowing rates, insurance premiums and mortgage rates. That in turn will lower the cost of doing business, spur another round of refinancing and add even more fresh spending to the economy. In short, the refinancing boom alone will probably pump more money into the economy than the entire federal government stimulus package.
So far the various private and government stimulus measures seem to be working. October retail sales rocketed a record 7.1 percent, hardly the sign of an economy in free fall. Overall consumer spending, which accounts for 70 percent of America's economy, increased 1.2 percent in the third quarter. Government spending is also up 1.8 percent in the same period.
Increased consumer demand, spurred largely by cheap borrowing and economic stimulus measures, should kick-start the U.S. economy at multiple levels, even in manufacturing. Businesses have now reduced inventories for eight months straight, dropping them by $38 billion in the second quarter and $50 billion in the third.
Christmas will trigger a spate of economic activity as retailers, wholesalers and manufacturers scramble to supply higher demand. Low inventories will mean new products will have to made, helping the manufacturing sector's recovery.
Some stimulus initiatives are already having their desired effect. Domestic car sales are up 36 percent from September to October and up 19 percent from a year earlier mainly due to zero-interest financing made possible by the Fed's cuts.
This trend may not continue forever, but it does have some staying power. General Motors announced Nov. 12 it would extend its zero financing through the New Year. Others -- across all retail industries -- will follow.
The only potentially dangerous aspect of all this demand and scant supply is inflation. But for now, that danger remains distant.
U.S. productivity was up 2.7 percent in the third quarter, muting fears of a collapse in business investment. The inflation rate in September was up only by 2.8 percent from a year earlier, while a glut of foreign goods will help keep inflation under control.
Finally, energy should remain cheap. The International Energy Agency forecasts that oil consumption in the developing world will dip by almost 1.3 million barrels per day by year-end. Even if OPEC manages the deep cut it wants, diminished demand and quota-cheating will ensure that the glut continues.
High American productivity, high overseas inventories and ample energy supplies should all conspire to keep U.S. inflation tame even as the economy roars back to life. |
