Friday, September 17, 2010

Forecasting: uncertainty rules

The UCLA Anderson School of Management predicts "very sluggish growth" for the foreseeable future.

Senior economist David Shulman offers two explanations for the ailing national economy.

The first is the "balance-sheet hypothesis" -- recoveries from the bursting of debt-fueled financial bubbles are invariably slow and are associated with high unemployment rates and rising government debt. Given that, Shulman suggests that a quick recovery is not likely.

Second, Shulman says, "The recovery from the balance-sheet recession is being exacerbated by an extraordinary increase in policy uncertainty, which is amplifying the usual economic uncertainties associated with recessions." Simply put, he believes that the nation's businesses are unsure of the implications of their investments — whether new hires or new computers — given the uncertainty surrounding tax, environmental, energy, financial, labor and health care policies.
"At present," Shulman said, "business firms can only make the wildest guesses as to what corporate and individual taxes will be next year, and, for that matter, three years from now what the cost of health care will be, whether or not there will be a revived cap-and-trade policy with respect to carbon emissions or whether the Environmental Protection Agency will step in with regulations of their own absent a statute, and whether it will be easier or more difficult to hedge risks with financial derivatives."
Bottom line: "As time passes," Shulman said, "the economy will naturally heal and the policy uncertainties will resolve themselves to allow growth to return to a 3 percent path, causing unemployment to begin a long-awaited downward trajectory. We forecast that these more ebullient trends will become noticeable by 2012."


 

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