New Economic Forecast Through 2011: Stagnant is the Word

Here's a mediocre forecast for you.  It's not a double dip or a doomsday story, but it's decidedly lackluster. At this rate of growth, the economy underperforms its potential for . . . as far as the eye can see.

Key motivator of the stagnant view: slow monetary growth.  In recent months I commented on the Fed's "quantitative tightening" and why economic growth has been so slow.  Second quarter GDP data confirm the slower rate of expansion.

The Good News for the Economic Outlook: The Fed will shift gears and stimulate the economy.  There's starting to be a recognition at the Fed that slow growth will be prolonged, and that some more easing would not be inflationary. In addition, the Fed board is about to get three new members, who are likely to be more inclined toward stimulus.  One, it was pointed out to me, could be an inflation hawk.  I replied that I, too, would be an inflation hawk if only I could find some inflation.

The Bad News for the Economic Outlook: Monetary policy takes time.  The slow growth of the money supply over the past 12 months will have persistent effects.  The new policy will impact the economy with a long time lag.  I use 12 months as a very rough rule of thumb.  Milton Friedman (happy birthday, by the way) famously observed that the times lags are "long and variable."  So I forecast sluggish growth for four quarters, then a small pickup.  I think there's the potential for a stronger pickup late in 2011, but the Fed would have to get working on that this month.

Double Dip Recession?  Not in my forecast, but the slower economic growth is, the less cushion we have against another downward force.  A European debt crisis seems the greatest risk at this time, but there are always risks. We simply do not have much margin for error.

What Should a Business Leader Do? Begin with a conservative sales forecast.  Then add in some contingency planning for a second recession.  You might also want to consider how to manage your business when sales are hard to forecast.  I'll be speaking on that topic at the National Fluid Power Association's  Industry and Economic Outlook Conference. If you are not in the fluid power industry, you can call me for some consulting advice–or bring me in to speak to your management team.