Tuesday, January 12, 2010

The Economy in 2010

The economy ended 2009 on an upswing. Some are predicting that the recovery will continue in 2010. I hope so. But I’m not so sure. I think there’s a chance for a “W” shaped recovery, although the second dip should not be as deep as the first.

Many of the jobs generated in the closing months of 2009 were temporary. Now, perhaps employers will make those workers permanent if they regain confidence in the economy. But in the meantime, there are still a lot of temporary and underemployed workers making less in wages than they would in a normal economy. That means less consumer spending than normal.

I’m also worried about the scope of the debt. In the next two years, we’re going to have to raise taxes substantially (probably across the board). At the same time, I expect interest rates to rise as foreign investors worry about the size of the deficit, and require a higher risk premium to keep them investing. This will mean taxes may have to rise still more to pay higher down the debt at higher interest rates.

Of course, raising taxes is hardly a recipe for economic recovery. Higher taxes could depress consumer spending and investment just as the economy is improving. I think these factors combined with a relatively weak job market will cause some loss in consumer confidence and cause the economy to worsen somewhat. There is the possibility that these factors don’t cause an actual decline, but instead growth to remain sluggish.

Fortunately, the worst is behind us, but the best may not be right in front of us either.

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