The ongoing impact of $2 trillion in government stimulus, with other factors such as pent-up consumer demand and returning consumer confidence, will finally lead to a turnaround, and the third quarter of next year will be “better than expected” by many, said Dr. Jim Paulsen, chief investment strategist of Wells Capital Management. “It’s like you’re at a cookout and you’re trying and trying to get your charcoal going and you keep squirting on lighter fluid and all of a sudden it goes ‘poof!’” Paulsen said.
Dr. Scott Anderson, senior economist for Wells Fargo & Company, predicted that the housing sector will lead the way. “One bright note is that the sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out,” Anderson said.
Monetary policy should be augmented with fiscal policy
Dr. Eugenio Aleman, senior economist for Wells Fargo & Company, said he was most concerned that monetary policy – the injecting of hundreds of billions of dollars into the economy through the financial sector – is not helping those who need it most.
“Current monetary policy will help only those households that do not need help – those that have plenty of money and have a stable job,” he said. “They will refinance, buy homes and consume. It will not help those who are struggling to make ends meet, or have lost their jobs or may soon lose them, because no financial institution is going to lend them money to buy a home, no matter what the interest rate is.” He said it is up to the new administration to help these households through fiscal policy, with government spending that will create jobs.
Anderson said the current job market is one of the worst in decades, with another 3.7 million jobs expected to be lost next year. That means that job losses in this recession will total 5.5 million, twice as many as were lost in the 1981-1982 recession, the second worst since World War II. He expects the unemployment rate to rise to 8.8 percent by the end of 2009 and to average 8.2 percent for the year. Deflation will also occur. Gross domestic product will decline in the first two quarters before expansion resumes in the third quarter.
Paulsen blamed “fear mongering” by government officials to persuade Congress to pass the $700 billion Troubled Asset Relief Program in the fall for the depth of our problems today. That, he said, “froze everyone in their tracks” and resulted in “economic paralysis.”
Factors leading to recovery – and long-term issues it will create
Paulsen predicted confidence will begin to return in the first half of next year, helped by “the consumer who waited to buy a car and is definitely going to need one.”
Anderson said the U.S. government will provide the primary support for the economy in 2009. This will come in a stimulus package from the new administration with infrastructure spending and middle-class tax cuts, plus “natural stabilizers” such as unemployment benefits, food stamps and other welfare payments. The infrastructure spending will be too narrow to help everyone, he said – but the middle-class tax cuts will offer more sustained consumer spending than recent one-time stimulus checks. Savings rates may also rise to 5 percent.
The economists worried about the long-term effects of government spending, likely to result in tax increases and inflation. “The U.S. government has plenty of ‘cheap’ financing to help the economy forward,” Aleman said. “This is going to be very expensive and will require higher taxes in the future, but the alternative is even worse. For the foreseeable future, we can expect economic growth to remain anemic – or until markets forget about past mistakes and start building the structure for the next big bubble.”
Reporters can hear a recording of the December 18th teleconference until January 17, 2009, by dialing 1-866-837-8032 (domestic) or 1-703-925-2474. The conference ID is 1303927.
Note: Comments by Wells Fargo’s economists during the teleconference are their own opinions and should be attributed to them as individuals, not to Wells Fargo & Company.
Wells Fargo Economists
Dr. Jim Paulsen is chief investment strategist of Wells Capital Management. He develops investment strategies that assist in the management of separate institutional account assets as well as mutual and collective investment funds. He focuses on national and global macro-economic trends, specifically investments, and interest rate forecasting.
Dr. Scott Anderson is a senior economist for Wells Fargo & Company. He analyzes and forecasts international, national and regional economic trends with a focus on macro-economic and interest rate forecasting, financial markets, international economics and the California economy.
Dr. Eugenio Aleman is a senior economist for Wells Fargo & Company. He analyzes and forecasts international, national and regional economic trends. He specializes in interest rate forecasting, international trade and finance, the Texas economy, and Latin American economies.
Wells Fargo’s economists offer their economic analysis at:
https://www.wellsfargo.com/com/insights/economics/ and http://www.wellscap.com/.
Wells Fargo & Company is a diversified financial services company with $622 billion in assets, providing banking, insurance, investments, mortgage and consumer finance through almost 6,000 stores and the internet (wellsfargo.com) across North America and internationally.
Wells Capital Management (WellsCap) is a registered investment adviser and a wholly owned subsidiary of Wells Fargo Bank, N.A. WellsCap provides investment management services for a variety of institutions. The views expressed are those of the WellsCap representative and are subject to change. They are shared for educational purposes only, and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product. The information is based upon information we consider reliable, but its accuracy and completeness cannot be guaranteed. Past performance is not a guarantee of future returns. As with any investment vehicle, there is a potential for profit as well as the possibility of loss. For additional information on Wells Capital Management and its advisory services, please view our web site at www.wellscap.com, or refer to our Form ADV Part II, which is available upon request by calling 415-396-8000.