2009 Predictions

(Published Nov. 8, 2008) 

(Note:  Updates are shown in bold italics.)

The election of a new president adds a level of uncertainty to any predictions for the coming year. However, my predictions are based upon the economic theory I’ve proposed in Five Short Blasts, and there is virtually nothing that President Obama can do to mitigate the effects of this theory in just one year. To very briefly restate my theory:

As our population continues to grow beyond its optimum level, forcing people to crowd together, per capita consumption inevitably declines as a lack of space makes it ever more difficult to store and use products, especially larger products. As per capita consumption declines, especially in the face of ever-rising productivity, rising unemployment and poverty are inescapable. This same effect occurs when we attempt to trade freely in manufactured goods with nations that are already overpopulated. The more overpopulated our trading “partner,” the worse is the effect.

Only actions to stabilize our population (especially reducing immigration) and action to restore a balance of trade through import quotas or tariffs have any hope of mitigating these effects. Because free trade with overpopulated nations instantly raises our effective population density, its effect is much more immediate than the steady growth in our population. Actions like import quotas and tariffs, designed to restore a balance of trade, will take several years to take effect as manufacturing is slowly shifted back to the U.S. Other “actions” (more like a lack of action) such as urging other nations to stimulate domestic growth and stop manipulating currencies, will be utterly ineffective.

So, based upon this theory, here are my predictions for 2009:

World Population

The world’s population will rise by 100 million to reach 6.85 billion people by the end of the year. This is more of a “given” than a prediction, but it’s important to acknowledge this fact because it forms the backdrop for my other predictions.  4th Quarter Update:  According to the U.S. Census Bureau’s “world population clock” (probably the best up-to-date estimate of world population available) the world’s population rose to 6.793 billion by the end of the year, an increase of about 50 million, or 0.74%.  This rate of increase has slowed from a rate of about 1.1%.  That’s very good news.

World Economy

1. In general terms, the global economy will continue to falter throughout 2009.  4th Quarter Update:  The global economy fell into steep decline early in the year, but stabilized following massive intervention by central banks, and remains on life support.  The following quote, taken from the IMF web site, summarizes the situation well:

   Speaking at the annual conference of the Confederation of British Industry, Strauss-Kahn said the major advanced country areas in particular remain fragile, still dependent on policy support. Financial conditions have improved, but are far from normal.

   “Signs show confidence returning, but banking systems in many advanced economies remain undercapitalized, weighed down by leaden legacy assets and, increasingly, non-performing loans,” Strauss-Kahn told the conference of U.K. private sector employers. “On the household side, weak financial positions and high unemployment will damp down on consumption for some time. And large public deficits add to vulnerabilities.”

   Strauss-Kahn said it is still too early for a general exit from accommodative fiscal, monetary, and financial sector policies. Such exit should instead await a sustained recovery in private demand, as well as entrenched financial stability.

2. Unemployment will rise throughout the world, intensifying competition for exports to the American market.  4th Quarter Update:  Unemployment in the U.S. rose steadily throughout the year, ending at 10.0% (a figure that would have been 12.0% if those who have given up looking for work were counted).  Unemployment in the Euro zone ended the year at its highest level – 12%.  Unemployment in Japan also ended at its highest level of the year – 6%.   

3. There will be a “Bretton Woods” style meeting of nations to try to overhaul the global economy. The rest of the world will press for one global currency and/or even freer access to the American market. These talks will end in failure as the U.S. balks at either approach.  4th Quarter Update:  Didn’t happen.  In spite of China making a lot of noise early in the year about the need to replace the dollar as the world’s reserve currency, that idea seems to have died.    

4. Central banks’ efforts to stabilize the currencies of developing countries will fail. There will be another currency crisis like in the late ’90s.  4th Quarter Update:  Didn’t happen.  A potential crisis with the South Korean won was averted.  China continues to resist pressure by the U.S. and the rest of the world to unpeg the yuan from the dollar.  The dollar fell throughout the year.  The Japanese finance minister has declared that the value of the yen has risen too high against the dollar, signaling potential intervention by Japan to weaken the yen.  The potential for currency “wars” remains in 2010.

5. The economies of Japan and Korea will be particularly hard hit and will slide into a severe recession.  4th Quarter Update:  Through the first three quarters of 2009 (the fourth quarter hasn’t yet been released at the time of this writing) Japan’s GDP, adjusted for inflation, contracted at an annual rate of 6.6%.  South Korea fared better, with GDP contracting at an annual rate of 1.8%, though the third quarter actually turned positive, rising at an annual rate of 0.9%. 

U.S. Population

1. The population of the U.S. will soar to over 308 million.  4th Quarter Update:  U.S. population rose to 308.4 million by the end of 2009, surpassing my expectation. 

2. Illegal immigration will be a low priority for the Obama administration. Enhancement of border security will continue. To everyone’s surprise, enforcement actions against employers who hire illegal immigrants will actually intensify.  4th Quarter Update:    Bad call.  Nothing further has been done to enhance border security.  Employment place raids that the Bush administration employed so successfully have ended.  Employment enforcement has deteriorated into paperwork audits with no enforcement.  One bright spot is that voluntary use of the E-Verify system by employers continues to grow dramatically.  Through the first half of 2009, the rate had doubled over 2008.

3. Legal immigration will also be a low priority of the Obama administration. To everyone’s surprise, those corporations who try to bring in more foreign workers will be rebuffed. When they complain that they can’t find American workers to do the job, they’ll be told, “try harder.”   4th Quarter Update:  No data for 2009 is available yet but, based upon the rate of growth in the U.S. population, it’s apparent that there was no let-up whatsoever in the rate of legal immigration.  If anything, it may have accelerated slightly. 

4. The birth rate in the U.S. will actually decline slightly.  4th Quarter Update:  No official statistics are available for 2009 yet, but this article published in August notes a correlation between the recession and falling birth rates.

5. As just one more indication of how bad the economy has become, average life expectancy will actually tick downward.  4th Quarter Update:  2009 data isn’t available yet.  But for evidence that growth in life expectancy has at least stalled, see https://petemurphy.wordpress.com/2009/08/20/u-s-life-expectancy-stalls-at-77-9-years/

6. Unfortunately, there will still be no official recognition of the problem of overpopulation.  4th Quarter Update:  None so far.

U.S. Economy

1. President Obama’s efforts to restore a balance of trade, especially in manufactured goods, will be too timid. He’ll begin by trying to “enforce” trade deals and by scolding some nations for manipulating their currencies. As has been the case for decades, such approaches will be utterly ineffective.  3rd Quarter Update:  Unfortunately, Obama’s approach has been worse than timid, bordering on cowardly.  He’s done nothing in response to Japanese dumping or tariffs imposed by Mexico.  Only in the past month (September) has he taken his first timid steps toward enforcing agreements, slapping a tariff on Chinese tire imports.  His broader approach has been to simply encourage other nations to rely more upon domestic growth in their economies and less upon exports to the U.S., with a predictable lack of results.  Although the trade deficit has declined dramatically, every bit of the decline is explained by falling oil prices and the global recession.  U.S. manufacturing is continuing to lose jobs at a frightening pace.  So far, Obama has renegged on promises to deal with trade imbalances and reinvigorate manufacturing.  When his do-nothing approach of trying to talk his way out of a trade deficit fails (the same approach taken by administrations for decades), will he give up or take a more hard line approach?  I used to think that his approach will change, but now it seems unlikely.

2. Our trade deficit in oil will fall some as demand slows and as oil prices weaken. I wouldn’t be surprised to see the Obama administration impose tariffs on oil imported from the Middle East and from Venezuela, driving gas prices higher once again, all in an effort to reduce dependency on these imports. But the money collected from the tariffs will be refunded to taxpayers through some kind of tax credit, thus making the program palatable.  3rd Quarter Update:  Indeed, oil prices and demand have softened.  But it’s not due to any plan to tax oil.  Instead, Obama has chosen to tax American consumers through a “cap and trade” program.  The net effect on oil consumption will be the same, if and when Congress ever passes a bill.

3. Our trade deficit in manufactured goods will remain stubbornly high. Declines in imports will be offset by declines in exports.  3rd Quarter Update:  Through August, monthly goods exports have declined by 2.7% while imports have declined by 9.6%.  But all of this improvement in the balance has been due to the recession’s effect on consumer spending.  It hasn’t translated into any gains in manufacturing.  In fact, the manufacturing sector of the economy continues to lose jobs.

4. Our cumulative trade deficit since 1975 will be just under $10 trillion by the end of the year.  3rd Quarter Update:  Through August it has risen to over $9.6 trillion.  $10 trillion appears to be a good bet. 

5. The recession will intensify and economists will be questioning whether we’re entering a depression by the end of the year.  3rd Quarter Update:  Though Wall Street did extremely well in the 3rd quarter, and it’s likely that there will be a stimulus spending boost to 3rd quarter GDP, any economic improvement ends there.  If anything the deterioration in the jobs market is accelerating, in spite of the government’s claim that people are dropping out of the work force, thus putting a lid on unemployment.  Vehicle sales and retail sales in general are as bad as ever.  And, as the 3rd quarter drew to a close, the president met with congressional leaders to begin considering a 2nd stimulus program aimed at boosting job “growth.”  That’s not something they would be doing if the economy were truly improving.  There’s little talk now of this recession deteriorating into a depression, but a “double dip” recession remains a distinct possibility. 

6. Real per capita GDP will decline in every quarter of 2009.  3rd Quarter Update:  Bad call.  Preliminary 3rd quarter GDP data shows the economy growing at an annualized rate of 3.5%.  However, with stimulus spending stripped out of the equation, the underlying economy continues to contract at an annualized rate of 3.7%. 

7. Unemployment will top 10%.  3rd Quarter Update:  Official unemployment hit 9.8% in September.  Almost no one  was predicting 10% when I made this prediction on Nov. 8th.  But the story is much worse.  By claiming that huge numbers of Americans are simply dropping out of the labor force, they have effectively “capped” unemployment.  The real rate is actually 11.2% (through September).  See https://petemurphy.wordpress.com/2009/10/07/u-s-unemployment-soars-to-11-2-785000-jobs-lost-in-september/

8. The Federal Reserve will lower rates to 0.25% with no effect.  3rd Quarter Update:  Done!  The rate hit 0-0.25% early in the year, and looks set to stay there indefinitely.  Decline in the economy has moderated, but actual growth remains elusive.

9. Credit will remain tight as our foreign creditors will find most American investments to be far too risky.  3rd Quarter Update:  The Fed continues to buy treasuries to prevent interest rates from rising due to slack foreign demand for U.S. treasuries.  Consumer credit continued to decline through the 3rd quarter and credit remains extremely tight in general, although mortgage rates have dropped significantly (if you can qualify!).

10. The federal government will find another huge bail-out necessary as the economy teeters on the brink of depression. This time the package will top a trillion dollars. Much will be devoted to infrastructure and renewable energy projects.  3rd Quarter Update:  In addition to the $789 billion stimulus package, the Federal Reserve has also announed up to a trillion dollars in additional stimulus.  At the end of the 3rd quarter, Obama met with congressional leaders to discuss yet another stimulus, although they didn’t call it that, choosing to use terms like “job creation.” 

11. GM, Ford and Chrysler will be at least partially nationalized by the end of the year. Low interest loans will give way to taking ownership stakes in the companies.  3rd Quarter Update:  Done!  Both are now almost wholly owned by the federal government.  I won’t be surprised to see the same thing happen to Ford next year. 

12. Many other major corporations will also require a federal bail-out to stay afloat.  3rd Quarter Update:  Virtually the entire financial system owes its continued existence to federal bail-out money. 

13. The stock market will decline further in 2009, with the S&P falling below 600 at some point.  There will be several attempts at a rally, as investors begin to hope for a recovery, but each rally will fail as fresh economic data shows an economy getting worse.  3rd Quarter Update:  At the time I made this prediction, the S&P was at about 930.  On March 12th, it fell as low as 666 before rebounding.  Since then, we’ve been enjoying a rally (just as predicted).  It won’t last, but it appears unlikely to collapse as low as 600 again.  The government simply won’t allow it to happen.  More stimulus money will be gushed into the economy to prevent it. 

14. Median home prices will continue to fall as unemployment and falling incomes shut more and more people out of the market.  More Americans will be forced into government low-income housing.   3rd Quarter Update:  The decline in home prices has moderated, but foreclosures continue at record rates.  One out of every 12 mortgages is now in default. 

15. By the end of the year, the Obama administration will begin to seriously consider enactment of import quotas and/or tariffs to protect domestic industries, especially the auto industry. Some tariffs may already be in place by the end of the year, angering many countries and increasing tensions.  3rd Quarter Update:  Obama’s move to slap tariffs on Chinese tires was the first timid step in this direction.  But I now doubt that we’ll see much more action on trade.  It’s clear that he simply doesn’t have the stomach for riling international tension. 

While the above predictions are dire, I believe that the last point above will actually set the stage for a rebound in 2010, one that really gathers steam as the year progresses, beginning with a jump in sales for domestic auto producers and a corresponding jump in employment. But let’s see how 2009 plays out first.

At the end of each quarter, I’ll do a review of these predictions versus actual events.  Here’s hoping I turn out to be far too pessimistic.