At 37th Parallel, our investors are made up of a incredibly diverse group of individuals from School Teachers to Lawyers to CPA’s to Brokers to….well, you get the picture. We felt it would be a great idea to send out an economic viewpoint from one of our current investors, Mike Arnold, a partner in a risk management and consulting firm that specializes in banking and financial services (www.alcopartners.com/)…in other words, his opinion is pretty qualified; Enjoy!…
Here’s Mike’s opinion on the economic forecast:
1) This crisis will be long over in the next 5-7 years.
2) Over a 5-7 time frame, there are no models that can predict where the economy is viz full employment. (Could we have another recessionary period in 7 years? Yes. But we can’t predict that now.)
3) Consequently, you look to the supply side (labor force growth + productivity growth) to project GDP/capita, which is the core metric of the economy.
4) On this basis, the view is quite positive, because the national savings rate should be higher in the next 7 years than it was in the last 7 years and this will be positive for productivity growth.
5) The bottom line: productivity growth outlook is quite good over the next 10 years. The current crisis clouds this underlying trend. Over a 7 year horizon, however, it is the key determinant of social welfare.
By the way, if you want my short term forecast it is this: economic forecasters are like lemmings. There
are no models that predict accurately how strongly the economy will grow following the turn. (Just look at how poorly last January they underpredicted the rate of contraction.) So, I can only look to history
as a guide. Taking the 11 recessions since World War II for guidance (this is the 12th) there is significant correlation between the depth of the recession and the strength of the recovery. This has been the deepest recession, so if the pattern continues, the recovery will be stronger and more vigorous than most forecasters have predicted.
The opposing view is based on the following narrative: A weak recovery will occur because the higher savings rate (i.e., families working down their debt-ratios rather than consuming) will lead to weak consumption and, hence, weak GDP growth.
Neither history nor math support this view. Consumption is already below trend, because households have already increased their savings rate. If the savings rate doesn’t increase from here, we will have consumption growth, albeit at lower ratios to GDP than previously. (But isn’t this what policy makers sought when they decried the low savings rates of households?) And it is the RATE, not LEVEL, that matters to the growth RATE of GDP.
Remember, economists are very good at explaining what happened and not so good at forecasting.
There are many unknowns about what will happen. Hence, I look to historical patterns to tell me what to expect next. The Fed has been intervening in the economy at levels unprecedented in history since mid Sept ‘08. Most of the $787 B in fiscal stimulus was designed to it the economy beginning the second half of this year and next year. The economy contracted faster than anyone expected and stopped contracting sooner than anyone predicted just six months ago. I think there is significant probability that economic growth will outperform expectation between now and the end of 2010.
…Thanks again to Mike for sharing his thoughts and insights with the group!
Dan Chamberlain | Operations Director, 37th Parallel Properties | dchamberlain@37parallel.com
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