DataPoints -- Dismal Scientist

The January Jobs Jolt

Fri, 3 Feb 2012 08:58 GMT

Employment gains blew past the most optimistic forecasts. Has the recovery turned the corner? Mark Zandi parses the numbers on CNBC and MSNBC.

Visit msnbc.com for breaking news, world news, and news about the economy

Fingering Fan and Fred

Tue, 24 Jan 2012 10:04 GMT

The two failed housing finance agencies made plenty of blunders, but they aren't to blame for the housing bubble, Mark Zandi writes in today's Washington Post:

The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study.

In other words, America’s mortgage securitization machine was fundamentally broken. It created millions of mortgage loans that, even under reasonable economic assumptions, stood little chance of being repaid — and were not. As a result, hundreds of billions of dollars were lost as defaults and write-downs brought the financial system, and the wider economy, to the brink, requiring a massive government bailout...

Getting history right for this dark economic period is critical if we are to design a better mortgage finance system for the future. If Fannie Mae and Freddie Mac are responsible for the debacle, then perhaps government’s role in a future mortgage finance system should be minimal. But if private lenders deserve most of the blame, the case grows for giving government an important role in backstopping and overseeing the system.

Read the whole thing.

January Forecast Assumptions

Tue, 17 Jan 2012 14:58 GMT

Monetary policy

The Federal Reserve aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at zero through mid-2013. They have coordinated with other central banks to reduce funding costs for foreign banks and are now selling short-term Treasury securities and using the proceeds to purchase long-term securities in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with 10-year Treasury yields near 2% and fixed mortgage rates falling to a record low of below 4%. The Fed is hoping this will take some financial pressure off debtors and encourage investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers also announced plans to change their communication strategy, which will have the effect of further easing policy. Each quarter, the FOMC will release forecasts of the federal funds rate. Though not a commitment, the forecast will present FOMC expectations of the appropriate funds rate conditional on its growth and inflation outlook. The forecast will likely show that the funds rate will not rise until well into 2014, much further into the future than most investors currently expect. This will influence market expectations and result in lower long-term interest rates.

The FOMC is also leaving open the possibility of a third round of quantitative easing. The next round of QE will likely involve more mortgage securities purchases and sharply expand the Fed’s balance sheet from its already-swollen $2.9 trillion. While the odds for QE3 this year are high, particularly if fiscal policymakers fail to extend the payroll tax holiday and emergency unemployment insurance programs through year’s end, it is not assumed in the current baseline outlook.

It will not be until late 2013 that the Fed begins tightening monetary policy and 2015 that it is able to normalize monetary policy. In a well-functioning economy that is operating near full employment, the federal funds rate target should be near 4.5%.

Fiscal policy

The fiscal 2011 federal budget deficit came in close to $1.3 trillion, approximately 8.5% of GDP. Tax revenues are increasing, and government spending is slowly declining. Continued growth and fading fiscal stimulus will lower the deficit in fiscal 2012. The narrowing will be limited by the assumption that policymakers will extend the 2% payroll tax holiday and emergency unemployment insurance programs through calendar year 2012. By fiscal 2015, the deficit will approach the so-called structural budget deficit—consistent with an economy operating near its potential—of around 5% of GDP. This is still well above the so-called sustainable budget deficit—a deficit consistent with a stable debt-to-GDP ratio—which is estimated to be closer to 2% of GDP.

Policymakers still need to raise tax revenues to achieve success, but that is likely as the expiration of the Bush tax cuts nears late next year. Under current law, tax rates will rise for everyone in 2013, but if policymakers simply agree to allow those tax cuts to expire for those in the top two income brackets, they will have done what they need to do.

U.S. dollar

The U.S. dollar has firmed during the current financial market turmoil. Despite the fiscal problems of the U.S., there is no obvious alternative currency for investors so they are staying put. From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, the Canadian dollar, and the Japanese yen and overvalued against the British pound. The dollar will gradually right itself against these currencies over the next several years.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by some 5% per annum over the next five to six years. U.S. policymakers would like this revaluation to occur more quickly but the Chinese are unlikely to comply.

On a trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change any time soon since there are no good alternatives.

Energy prices

Oil prices have strengthened a bit as global recession risks have faded somewhat in recent weeks. Oil prices have been highly volatile in recent years, ranging from $40 per barrel during the depths of the Great Recession to a record of almost $150 per barrel in the summer of 2008.

Given recent events and the likely damage this is doing to global growth and oil demand, WTI is expected to hover near $100 per barrel through 2012. The willingness of sovereigns to use their strategic petroleum reserves to meet oil supply disruptions limits any upside to prices. However, barring a full-blown global recession, it will be difficult for prices to go much lower for any length of time given the potential for further unrest in the Middle East, which has added a risk premium of close to $10 per barrel. Longer run, oil prices are expected to trend higher, increasing at a pace that is above the overall rate of inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at less than $4 per million BTUs, and will have trouble keeping up with oil prices during the next several years. A substantial glut of natural gas has developed and will weigh on natural gas prices this year and into next. Prices will eventually gain traction as the cheaper gas attracts alternative uses.

December Forecast Assumptions

Mon, 9 Jan 2012 14:11 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at zero through mid-2013 and are now selling short-term Treasury securities and purchasing long-term securities in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low of nearly 4%. The Fed is hoping that this will take some financial pressure off debtors and prompt investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing, with better than even odds of a third round. More QE has significant downsides, but it is the Fed’s most effective remaining policy step. The next round of QE will likely involve more mortgage securities purchases. The Fed’s balance sheet is expected to expand from $2.8 trillion currently to nearly $3.5 trillion by the end of 2012.

Given recent events, it will not be until late 2013 that the Federal Reserve begins tightening monetary policy and 2015 that it is able to normalize monetary policy. In a well-functioning economy that is operating near full employment, the federal funds rate target should be around 4.5%.

Fiscal policy

The federal budget deficit came in close to $1.3 trillion, approximately 8.5% of GDP, in just-ended fiscal 2011. Tax revenues are increasing, and government spending is declining. While still extraordinarily large, this is meaningfully below the record $1.4 trillion fiscal 2009 deficit.

Continued economic growth and a fading fiscal stimulus will lower the deficit in fiscal 2012. The narrowing will be limited by the assumption that policymakers will extend the 2% payroll tax holiday through calendar year 2012. This will cost the Treasury about an additional $120 billion. Nonetheless, the fiscal 2012 deficit is expected to come in close to $1.2 trillion.

By fiscal 2015, the deficit is expected to settle in near the so-called structural budget deficit—consistent with an economy operating near its potential—of close to 5% of GDP. However, this is well above the so-called sustainable budget deficit—a deficit consistent with a stable debt-to-GDP ratio—which is estimated to be closer to 2% of GDP. The deal struck over the debt-ceiling standoff did not achieve fiscal sustainability but was a step in the right direction. The deal cuts $2.1 trillion in government spending over the next decade, more than half the $4 trillion in deficit reduction everyone agrees is the appropriate goal.

Policymakers still need to raise taxes to achieve success, but that is likely. Under current law, tax rates will rise for everyone in 2013, but if policymakers simply agree to allow those tax cuts to expire only for those making more than $250,000 annually, they will have done what they need to do.

U.S. dollar

From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen and a bit overvalued against the British pound. The dollar will slowly right itself against these currencies over the next several years.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by some 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this given their view that this would be a problem for their export-oriented manufacturers.

On a broad trade-weighted basis across all currencies and over the long run, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change any time soon since there are no viable alternatives.

Energy prices

Oil prices have strengthened a bit as global recession risks have faded somewhat in recent weeks. A barrel of West Texas Intermediate is going for nearly $100 per barrel, up from a recent low of less than $80. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel during the depths of the Great Recession to a record of almost $150 in the summer of 2008.

Given recent events and the likely damage this is doing to global economic growth and thus oil demand, WTI is expected to remain near $100 per barrel through 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time because of the potential for further unrest in the Middle East, which has added a risk premium of close to $10 per barrel to oil prices.

Longer run, oil prices are expected to trend steadily higher, increasing at a pace that is above the overall rate of inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at less than $4 per million per BTUs, and will have trouble keeping up with oil prices during the next several years, as a very substantial glut of natural gas has developed.

Progress on U.S. Jobs

Fri, 6 Jan 2012 09:33 GMT

December's data showed employment slowly increasing, while the jobless rate ticked down. A solid trend? Mark Zandi and the CNBC crew discuss.

Parsing the Outlook for 2012

Fri, 6 Jan 2012 08:23 GMT

The economy's woes hang over yet another new year. What are the chances for real improvement? Mark Zandi looks at the data on CBS' Early Show.

The Price of Gridlock

Wed, 21 Dec 2011 10:20 GMT

Washington's inability to extend current payroll tax rates and jobless benefits could knock the U.S. economy off track in 2012, Mark Zandi tells Bloomberg News.

What About that Falling Jobless Rate?

Fri, 2 Dec 2011 10:05 GMT

November's employment data generates some head-scratching. Mark Zandi puzzles it out with the CNBC crew.

After the Super Committee, What?

Tue, 22 Nov 2011 09:35 GMT

The congressional panel's failure to agree sets up a potential showdown for the economy. Mark Zandi discusses with Bloomberg TV.

November Forecast Assumptions

Mon, 21 Nov 2011 14:30 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to maintain the federal funds rate target effectively at zero through mid-2013, and they are now selling short-term Treasury securities and purchasing long-term securities, in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low of almost 4%. The Fed is hoping that this will take some financial pressure off debtors and prompt investors and creditors to take more risk, supporting stock prices and lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing, with better than even odds of a third round. More QE has significant downsides and is likely losing some of its effectiveness, but is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from the current $2.8 trillion to almost $3.5 trillion by the end of 2012.

Given recent events, the Federal Reserve will not begin to tighten monetary policy until late 2013, and to normalize policy until 2015. In a well-functioning economy that is operating near full employment, the federal funds rate target should be near 4.5%.

Fiscal policy

The federal budget deficit came in at $1.3 trillion, or 8.7% of GDP, in the just-ended fiscal 2011. Tax revenues are increasing and government spending is declining. While still extraordinarily large, this deficit is meaningfully below the $1.4 trillion in fiscal 2009. These mammoth deficits reflect both the Great Recession and the government’s response to it.

Continued economic growth and fading fiscal stimulus measures will result in more improvement in the deficit in fiscal 2012. However, the assumption that policymakers will adopt the president’s proposal to extend and expand the current payroll tax holiday through calendar 2012 will somewhat limit the narrowing. Nonetheless, the fiscal 2012 deficit is expected to come in around $1.2 trillion.

By fiscal 2015, the deficit is expected to settle in near the so-called structural budget deficit—consistent with an economy operating at its potential—of close to 5% of GDP. However, this is still well above the sustainable budget deficit—that consistent with a stable debt-to-GDP ratio—of closer to 2% of GDP. The deal over the debt-ceiling standoff did not achieve fiscal sustainability, but was a step in the right direction. The deal cuts $2.1 trillion in government spending over the next decade, more than one-half of the $4 trillion in deficit reduction everyone agrees is the appropriate goal. The mechanisms to achieve these cuts appear reasonably durable, including the congressional super commission to report out by late November.

Policymakers will still need to raise taxes to achieve success, but that is likely. Under current law, tax rates will rise for everyone at the beginning of 2013, but if policymakers simply agree to allow those tax cuts to expire only for those making more than $250,000, they will have done what they need to do.

U.S. dollar

The U.S. dollar has firmed during the current financial market turmoil. Despite the fiscal problems of the U.S., there is no obvious alternative currency for investors in uncertain times, and they are more or less staying put. From a long-run perspective, the U.S. dollar is currently modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar will slowly right itself against these currencies over the next several years.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by about 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this given their view that it would be a problem for their export-oriented manufacturers.

Over the long run, on a broad trade-weighted basis across all currencies, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation are overdone.

Energy prices

Oil prices have strengthened a bit as global recession risks have faded somewhat in recent weeks. A barrel of West Texas Intermediate crude is going for close to $100, up from a recent low of less than $80. Oil prices have been extraordinarily volatile in recent years, ranging from $40 during the depths of the Great Recession, to a record of almost $150 in the summer of 2008.

Given recent events and the likely damage this is doing to global economic growth and oil demand, WTI is expected to remain below $100 per barrel through 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time because of the potential for further unrest in the Middle East, which has added a risk premium of close to $10 per barrel to oil prices.

Over the longer run, oil prices are expected to trend steadily higher, increasing at a pace above overall inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at well below $4 per million BTU, and will have trouble keeping up with oil prices during the next several years, as a very substantial glut of natural gas has developed.

Deal or No Deal?

Mon, 21 Nov 2011 09:13 GMT

Deal or no deal? Mark Zandi handicaps the chances of a deficit agreement, and discusses the consequences of the super committee's failure.

U.S. Employment Crawls Forward

Fri, 4 Nov 2011 09:48 GMT

October's numbers weren't a disaster, but progress is achingly slow. Mark Zandi discusses the data on CNBC.

October Forecast Assumptions

Fri, 28 Oct 2011 08:10 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at zero through mid-2013, and are now selling short-term Treasury securities and using the proceeds to purchase long-term securities in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low of less than 4%. The Fed is hoping that this will take some financial pressure off debtors—refinancing activity has already picked up—and prompt investors and creditors to take more risk, thus supporting stock prices and greater lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing, in which the Fed creates money to expand its balance sheet. A third round of QE is likely; although there are significant downsides, it is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from $2.8 trillion now to near $3.5 trillion by the end of 2012.

The Federal Reserve will not begin to tighten monetary policy until late 2013. Monetary policy will not normalize, with a fed funds rate near its long-run level of 4.5%, until 2015.

Fiscal policy

The federal budget deficit for the just-ended fiscal 2011 was $1.3 trillion, approximately 8% of GDP. While still extraordinarily large, this was meaningfully below the $1.4 trillion fiscal 2009 deficit. Continued growth and fading fiscal stimulus measures will result in a smaller deficit in fiscal 2012. However, the assumption that policymakers will adopt the president’s proposal to extend and expand the current payroll tax holiday through calendar 2012 will limit the narrowing; this will cost the Treasury almost $175 billion. Nonetheless, the fiscal 2012 deficit is expected to come in close to $1.2 trillion.

By fiscal 2015, the deficit is expected to settle in near its “structural” level—that consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the “sustainable” budget deficit—that consistent with a stable debt-to-GDP ratio—of closer to 2% of GDP.

The deal struck between the president and Congress to end the debt-ceiling standoff did not achieve fiscal sustainability but was a major step in the right direction. The deal cuts $2.4 trillion in government spending over the next decade, more than one-half of the $4 trillion in deficit reduction everyone agrees is the appropriate goal.

Policymakers still need to raise revenues to achieve success, but that is likely as the expiration of the Bush personal income tax cuts nears. Under current law, tax rates will rise for everyone in 2013, but if policymakers allow those tax cuts to expire for only those making more than $250,000, they will have done what they need to do. The baseline assumes that policymakers achieve fiscal sustainability by 2013.

U.S. dollar

From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar will slowly right itself against these currencies over the next several years as these economies normalize.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate about 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the U.S. trade deficit with China, but the Chinese are unlikely to go along, given their view that this would be a problem for their exporters. The yuan has appreciated more quickly during the recent financial market turmoil, which may signal some increased flexibility by the Chinese.

Energy prices

Oil prices have fallen sharply in the financial market turmoil. A barrel of West Texas Intermediate crude oil is going for close to $85; this compares with a recent peak in early May of almost $115 per barrel. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009, to a record of almost $150 per barrel in the summer of 2008.

Given recent events and likely damage to the global economy and thus oil demand, WTI is expected to remain below $100 per barrel through early 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time because of the potential for more unrest in the Middle East.

Over the long run, oil prices are expected to trend steadily higher, increasing faster than overall inflation. Driving this outlook is the difficulty that the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low—particularly compared with oil prices—at close to $4 per million BTUs and will have trouble keeping up with oil prices during the next several years. A very substantial glut of natural gas has developed as demand has not fully recovered from the recession and supply has increased substantially in response to the very high prices that prevailed prior to the recession.

A Debate on Obama's Jobs Plan

Thu, 27 Oct 2011 11:30 GMT

The pros and cons of the president's latest economic initiative were aired this week at NYU. Who won? Slate recounts the evening's ups and downs.

Don't have time to sit through the video? Fox business news sums up the arguments. And The Economist dives into the deeper implications of the debate.

Supported by Beijing

Mon, 24 Oct 2011 09:25 GMT

Is the global economy resting on China's shoulders? Mark Zandi discusses with Nouriel Roubini.

Call it a "Growth Recession"

Tue, 18 Oct 2011 17:45 GMT

What are the chances for a double-dip downturn in the U.S.? Mark Zandi and Nouriel Roubini discuss.

Which Way for the Euro Zone?

Fri, 14 Oct 2011 15:41 GMT

Which way for the euro zone? Mark Zandi joins Nuriel Roubini to look at the painful options facing Europe.

September Forecast Assumptions

Wed, 12 Oct 2011 13:34 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and the weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at 0% through mid-2013. Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low. The Fed is hoping that rock-bottom interest rates will take some financial pressure off debtors—refinancing has already picked up—and prompt investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing. It is now more likely than not that the Fed will undertake a third round of QE. This has significant downsides, and QE is likely losing some of its effectiveness, but given the damage recent events have done to the economy, this is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from $2.8 trillion currently to near $3.8 trillion by the end of 2012.

Given recent events, the Federal Reserve will not begin tightening monetary policy until late 2013 and will not normalize policy until 2015, with a federal funds rate target near 4.5%.

Fiscal policy

The federal budget deficit is on track to come in close to $1.25 trillion, approximately 8% of GDP, in the current fiscal year, which ends this month. Tax revenues are increasing and government spending growth is slowing. While still extraordinarily large, this is meaningfully below the record $1.4 trillion fiscal 2009 deficit.

Continued economic growth and fading fiscal stimulus will result in more improvement in the deficit in fiscal 2012. However, it is assumed that policymakers will adopt the president’s proposal to extend and expand the current payroll tax holiday through calendar year 2012, costing the Treasury an additional $175 billion. Thus, the fiscal 2012 deficit will come in close to $1.2 trillion.

The deal struck between the president and Congress to end the debt-ceiling standoff did not achieve fiscal sustainability but was a substantive step in the right direction. The deal cuts $2.4 trillion in government spending over the next decade, more than one-half of the $4 trillion in deficit reduction everyone agrees is the appropriate goal. The mechanisms to achieve these cuts appear durable.

Policymakers still need to raise revenues to achieve success, but that is likely as the expiration of the Bush personal income tax cuts nears at the end of next year. Under current law, tax rates will rise for everyone in 2013, but if policymakers allow those tax cuts to expire for only those making more than $250,000, they will have done what they need to do. The baseline outlook assumes that policymakers achieve fiscal sustainability by early 2013.

U.S. dollar

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate some 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to go along, given their view that this would be a problem for their export-oriented manufacturers.

On a broad, trade-weighted basis across all currencies and over the long run, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change much any time soon.

Energy prices

Oil prices have fallen sharply in the financial market turmoil. West Texas Intermediate crude oil is going for around $90 per barrel; this compares to the recent peak in early May of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009, during the depths of the Great Recession, to a record of almost $150 per barrel in the summer of 2008.

Given recent events and likely damage to the global economy and thus oil demand, WTI is expected to remain below $100 per barrel through early 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time given the potential for more unrest in the Middle East.

Checking out the Challengers

Mon, 10 Oct 2011 15:43 GMT

The GOP's presidential hopefuls are expected to confront the jobs question when they debate this week. Mark Zandi frames the issue with Bloomberg.

When Politics and Economics Collide

Mon, 10 Oct 2011 11:22 GMT

Can Washington help stave off recession and still deal with the long-term deficit? And what about the housing market? Mark Zandi discusses with CNN.

Relief on Jobs

Mon, 10 Oct 2011 09:50 GMT

The U.S. isn't in recession, but has a long way to go before we can breathe easy. Mark Zandi discusses the latest data with Bloomberg TV.

Overcoming Europe's Policy Paralysis

Fri, 7 Oct 2011 12:31 GMT

Coming up, a free web conference on the European outlook.

Overcoming Policy Paralysis
October 13, 2011 • 10AM EST / 2PM GMT
Speakers: Enam Ahmed, Melanie Bowler & Zach Witton
Join Moody’s Analytics top economists as they discuss the updates to the European economic outlook.
» The western European economy is in recession.
» To avoid a severe recession, European policymakers need to act aggressively.
» The bailout fund must be expanded, and the banking system recapitalized.
» Pressure on the ECB to do more will intensify.
» Greece will restructure debt by next summer.
» The threat of more policy errors is high.

No charge to listen in: Click here to register.

A Small Sigh of Relief on Jobs

Fri, 7 Oct 2011 12:20 GMT

September's U.S. employment report shows tepid growth and no change in the unemployment rate. Mark Zandi comments on CNBC.

Recessionary Politics

Mon, 26 Sep 2011 08:36 GMT

Washington gridlock nudges up the odds of a new downturn, Mark Zandi tells CBS' "Face the Nation."

Where's Unemployment Going?

Fri, 16 Sep 2011 13:53 GMT

Even with a plan, the jobless rate may not fall below 9% in 2012, Mark Zandi tells Bloomberg.

Redefining Optimism

Tue, 6 Sep 2011 14:00 GMT

After a string of bleak numbers, the outlook is looking dimmer but not hopeless. Mark Zandi discusses with CNBC.

Another Jobs Disappointment

Fri, 2 Sep 2011 09:30 GMT

U.S. payrolls were flat in August, and the unemployment rate stayed at 9.1%. Mark Zandi discusses the numbers with CNBC.

The Fed Lowers Expectations

Wed, 31 Aug 2011 09:00 GMT

The latest FOMC minutes show the central bank trimming its view of U.S. potential growth, Mark Zandi tells CNBC.

Asia Begins to Feel the Slowdown

Wed, 31 Aug 2011 08:36 GMT

Export-dependent economies such as the Philippines are vulnerable to external shocks, Katrina Ell tells Bloomberg News.

Assessing Irene

Tue, 30 Aug 2011 09:06 GMT

How did Hurricane Irene affect the U.S. economic landscape? Ryan Sweet examines the impact on PBS' Nightly Business Report (starts at 6:00 minutes).

Watch the full episode. See more Nightly Business Report.

The Fed's Future Course

Mon, 29 Aug 2011 14:37 GMT

Policymakers can and likely will do more to support the economy, Mark Zandi tells Bloomberg News.

No Magic Bullets

Mon, 22 Aug 2011 09:51 GMT

The risks are rising, but skilled policy can keep the U.S. out of recession, Mark Zandi tells CBS News

More Market Misery

Thu, 18 Aug 2011 17:46 GMT

As the economy teeters, what role is there for policy? Mark Zandi discusses the latest developments with Ezra Klein and Jared Bernstein on MSNBC.

Visit msnbc.com for breaking news, world news, and news about the economy

August Forecast Assumptions

Thu, 18 Aug 2011 07:45 GMT

Monetary policy

Long-term interest rates have fallen significantly in response, with fixed mortgage rates closing in on record lows. The Fed hopes that low interest rates will take some financial pressure off debtors—refinancing activity has already picked up—and prompt investors and creditors to take more risk, thus supporting stock prices and lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing. Another round of QE is now more likely. Although QE is likely losing some of its effectiveness, it is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from the current $2.8 trillion to nearly $4 trillion by next spring. Given recent events, the Fed will not start to tighten monetary policy until 2013, and will not normalize monetary policy until 2015, with the federal funds rate target near 4.5%.

Fiscal policy

The federal budget deficit is on track to come in close to $1.25 trillion, approximately 8% of GDP, in the current fiscal year. Tax revenues are increasing and government spending is declining. While still extraordinarily large, this is well below the record $1.4 trillion fiscal 2009 deficit.

The unprecedented deficits reflect the Great Recession and the costs of the government’s multifaceted response to it. The total direct costs of stabilization policies are expected to reach almost $1.6 trillion. Of this, $1.3 trillion is the cost of the various fiscal stimulus efforts. Adding in nearly $750 billion in lost revenue from the weaker economy, the total budgetary cost of the crisis is projected to top $2.35 trillion, more than 15% of GDP. For historical comparison, the savings and loan crisis of the early 1990s cost some $350 billion in today's dollars, $275 billion in direct costs plus $75 billion due to the associated recession, equal to almost 6% of GDP.

Continued economic growth and the fading fiscal stimulus will result in more improvement in the deficit in fiscal 2012. The assumption that policymakers will extend the current payroll tax holiday through calendar year 2012 will limit the narrowing, however, costing the Treasury around $110 billion. The fiscal 2012 deficit is expected to come in close to $1.1 trillion. By fiscal 2014, with the economy operating near its potential, the deficit is expected to be close to 5% of GDP. This structural deficit will still exceed the sustainable level of 2% of GDP consistent with a stable debt-to-GDP ratio over time.

The deal between the president and Congress to end the debt-ceiling standoff cuts $2.4 trillion in government spending over the next decade, more than half the desired $4 trillion in deficit reduction. Policymakers still need to raise tax revenues to achieve success, but that is likely given the upcoming expiration of the Bush income tax cuts late next year. If policymakers simply agree to allow those tax cuts to expire only for those making more than $250,000 annually, they will have raised enough revenue to achieve a sustainable deficit. The baseline assumes that policymakers are able to achieve fiscal sustainability by early 2013.

U.S. dollar

The U.S. dollar has held up well in the current market turmoil and global foreign exchange markets have been relatively stable. With no obvious alternative to the dollar, investors are largely staying put.

From a long-run perspective, the U.S. dollar is currently modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar will right itself against these currencies slowly over the next several years as those economies normalize.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by about 5% annually over the next five to six years. U.S. policymakers would like a quicker revaluation, but the Chinese are unlikely to accommodate this given their concern for their export-oriented manufacturers.

On a broad trade-weighted basis, the dollar is expected to depreciate modestly, but concerns over a rapid broad-based depreciation are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change much soon. The U.S. remains far and away the global economy's largest and most stable economy and the predominant player in global trade.

Energy prices

Oil prices have fallen sharply in the financial market turmoil. A barrel of West Texas Intermediate is going for $85; this compares to the recent peak in early May of almost $115. Given recent events and the likely damage this is doing to global economic growth and thus oil demand, WTI is expected to remain below $100 per barrel through early 2012. Also limiting any upside to prices is the demonstrated willingness of governments to use their strategic petroleum reserves to meet any disruption to oil supplies. However, it will be difficult for prices to go much lower given the potential for more unrest in the Middle East. A risk premium of close to $10 per barrel is built into oil prices.

Longer run, oil prices are expected to trend steadily higher, increasing at a pace above the overall rate of inflation. Higher demand from faster-growing, less energy-efficient emerging economies drives this outlook.

Natural gas prices remain low, at nearly $4 per million per BTU, and will have trouble keeping up with oil over the next several years because of the substantial glut that has developed as demand has not fully recovered from the recession and supply has increased in response to the high prices that prevailed prior to the recession. Prices are expected to eventually gain traction as less expensive gas attracts alternative uses.

Message of the Markets

Mon, 15 Aug 2011 17:21 GMT

Stocks went south last week, then came back. What does that mean for the economy? Mark Zandi discusses with CNBC.

Stay Calm, Watch the Fundamentals

Tue, 9 Aug 2011 09:39 GMT

The economy's path depends to a large extent on how Main Street reacts to Wall Street's roller-coaster, Mark Zandi tells CBS.

What to Do About Jobs

Mon, 8 Aug 2011 14:35 GMT

Washington is not out of tools to help get Americans back to work, Mark Zandi tells CNN.

A Crisis of Confidence

Mon, 8 Aug 2011 10:46 GMT

The Standard & Poor's credit downgrade is just the latest blow to a delicate collective psyche. Mark Zandi discusses the implications with Bloomberg.

A Glimmer of Hope on Jobs?

Fri, 5 Aug 2011 09:29 GMT

The July employment report was, if not exactly good, at least better than expected. Mark Zandi discusses with the CNBC crew.

Update: Gus Faucher explains the numbers for Fox Business news.

After the Debt Drama

Wed, 3 Aug 2011 09:51 GMT

Now that the threat of default has been removed, what can policymakers do to spur the economy? Mark Zandi discusses the next step with MSNBC.

Visit msnbc.com for breaking news, world news, and news about the economy

Markets Signaling Slowdown?

Wed, 3 Aug 2011 08:57 GMT

The debt crisis is past, but confidence still seems lacking. Mark Zandi discusses the market reaction with CNBC.

Tighter Money Down Under

Wed, 3 Aug 2011 08:30 GMT

From Sydney, Matt Circosta tells Bloomberg News that recent data are likely to push Australia's central bank toward more tightening.

Hope for a Debt Deal

Sun, 31 Jul 2011 13:17 GMT

Weekend negotiations raised hopes for an eleventh-hour fiscal compromise. Mark Zandi tells CNN that "the economy hangs in the balance."

Running Out of Headroom

Wed, 27 Jul 2011 09:36 GMT

What happens to mortgage and other interest rates if the U.S. doesn't raise the ceiling? Mark Zandi talks with ABC News.

Mark also talks with CBS

Nearing the Cliff

Tue, 19 Jul 2011 10:16 GMT

Will Congress get it together in time? Yes, Mark Zandi tells Bloomberg—because the alternative is so dark.

July Forecast Assumptions

Mon, 18 Jul 2011 07:48 GMT

Monetary policy

The Federal Reserve ended its quantitative easing effort on schedule in June. The Fed’s balance sheet is thus peaking at close to $2.8 trillion, about $2 trillion greater than it would be in more normal circumstances. Although the Fed is not expected to engage in another round of QE, it is expected to maintain its current balance sheet at least through the end of the year by purchasing enough Treasury securities to offset those that are maturing.

The end of QE should have little immediate impact on long-term interest rates. The link between QE and long-term rates is the proportion of the stock of Treasury debt owned by the Fed, not the proportion of Treasury bond issuance. The Fed has ended its purchases of Treasury issuance, but its share of the stock of Treasuries outstanding will not change, at least not for awhile. Indeed, 10-year Treasury yields in early July remain very low, at close to 3%.

Despite the end of quantitative easing, the Fed is not expected to raise rates until mid-2012. Key benchmarks necessary for the Fed to raise rates will be an unemployment rate that is firmly below 9% and falling steadily, and core inflation that is above 1% and definitively accelerating. When policymakers do begin raising rates, the interest rate on reserves and not the federal funds rate is likely to become the key target rate until the Fed has successfully drained the large amount of excess reserves it supplied to the banking system. The interest rate on reserves is expected to end 2012 at 1% and will not normalize, to just over 4%, until 2014.

Fiscal policy

The federal budget deficit is on track to come in near $1.35 trillion, approximately 9% of GDP, in the current fiscal year. This is about the same deficit as in fiscal 2010, and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

The better economy and the fading of fiscal stimulus will result in a quickly shrinking deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near its structural level—that consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the sustainable budget deficit, which is closer to 2% of GDP.

Policymakers are expected to resolve the current debate over raising the federal debt limit in a reasonably graceful way. Without an increase in the ceiling by early August, the Treasury would be forced to stop paying some of the government’s bills, and the spending cuts would be substantial. The economy would devolve back into recession under the weight of severe budget cutting, the stock market would swoon, and interest rates would rise.

It is increasingly likely that something good will come out of this process, perhaps an agreement on the magnitude of future deficit reduction and a budget mechanism to help achieve this goal. Policymakers have appropriately coalesced around $4 trillion in deficit reduction over the next decade, likely to come from both spending restraint and tax increases. If achieved this would result in a sustainable budget deficit by early in the next decade. The task of more precisely defining how to achieve these deficit reduction targets will be left to early in the next presidential term.

U.S. dollar

The U.S. dollar is trading at the low end of the range that has prevailed since the financial panic hit three years ago. From a long-run perspective, the dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar is significantly overvalued against the yuan and is expected to depreciate by some 5% annually against the Chinese currency over the next five to six years. U.S. policymakers would like this revaluation to occur more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to go along given their view that this would be a problem for their export-oriented manufacturers.

The dollar is expected to depreciate modestly on a long-run, broad, trade-weighted basis. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and the U.S. remains far-and-away the global economy's largest and most stable economy and predominant player in global trade. There are also no good alternatives.

Energy prices

The price of a barrel of West Texas Intermediate crude oil has fallen in recent weeks back to around $95. Prices are still above the less than $90 at the start of the year before social unrest in the Middle East boiled over, but are well below the early-May peak of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009 during the depths of the recession, to a record of almost $150 per barrel in the summer of 2008.

The price of a barrel of WTI is expected to average near $100 this year. It will be difficult for prices to go much lower for any length of time given the potential for more problems in the Middle East, which is adding a risk premium of about $10 per barrel to oil prices. Oil prices are not expected to go over $100 for any length of time given weaker oil demand growth from slower-growing emerging economies and the willingness of sovereigns to use strategic petroleum reserves to meet any disruption of oil supplies.

In the long run, oil prices are expected to trend steadily higher, increasing at a pace above the overall rate of inflation given increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at above $4 per million per BTU, and will have trouble keeping up with oil prices during the next several years.

Debt Drumbeat II

Fri, 15 Jul 2011 11:40 GMT

The following appeared Friday, July 15 in the Washington Post:

Moody’s economist Mark Zandi: How to cut the deficit — and the trouble if we don’t

The Obama administration and Congress must raise the federal debt ceiling by Aug 2. That is all there is to it. In a post-default world, financial markets would unravel and the U.S. and global economy would enter another severe recession. The nation’s already daunting fiscal problems would spiral out of control as tax revenue plunged and demand surged for unemployment insurance, food stamps, Medicaid and other programs supporting vulnerable Americans.

Yes, it would be wonderful if politicians could agree to rein in future budget deficits as part of a debt-limit deal. But that isn’t necessary right now. Simply raising the debt ceiling enough to last through next year’s elections would appease global investors and sustain the economic recovery. The 2012 vote will be a referendum on how to address our fiscal problems: The winner sets the agenda, and tough decisions can be made after the next president and Congress take office.

It is laudable that lawmakers have attempted to do more now, hoping that the pressure surrounding the debt ceiling would force big changes in fiscal policy. And it is encouraging that they are coalescing around the same budget math: President Obama has called for about $4 trillion in deficit reduction over the next decade; so did Republican Rep. Paul Ryan (Wis.), chairman of the House Budget Committee, in his budget proposal; and so did the Simpson-Bowles fiscal commission. About $4 trillion over 10 years is the amount of deficit reduction needed to make the government’s fiscal situation sustainable, keep interest rates low and strengthen our economy in the long run.

There are significant disagreements over the composition of the deficit reduction, but these can be overcome, if we agree to achieve the entire $4 trillion reduction through cuts in government spending — and that includes tax expenditures.

Here’s how that can work. Approximately $2 trillion in cuts would affect discretionary non-defense spending, defense outlays and entitlement programs. (After all, there is no way to address our budget problems without meaningfully changing Social Security, Medicare and Medicaid.) Another $1 trillion would come through cuts in tax expenditures — the exclusions, exemptions, deductions and credits that riddle the tax code, costing the government more than $1 trillion each year. The mortgage interest deduction alone is worth some $1.4 trillion over the next decade. But there are hundreds more, indirectly funding student expenses, health insurance, child-care costs, local property taxes and on and on.

Tax expenditures are more properly thought of as government spending than as tax cuts. A deduction for local property taxes, for example, is equivalent to the federal government sending checks to homeowners. Cutting tax expenditures is thus cutting government spending. Indeed, removing tax expenditures — tax breaks targeted for specific purposes — is analogous to eliminating congressional earmarks.

Most tax expenditures are also inefficient and regressive. The mortgage interest deduction, for example, does nothing to improve housing affordability, its ostensible goal. Any tax benefit is simply capitalized into house prices, which rise as the deduction fuels demand. And the benefits go to owners of bigger homes with larger mortgages and higher incomes, who can itemize and thus claim the deduction.

Debt-Ceiling Drumbeat

Thu, 14 Jul 2011 11:38 GMT

Tensions are rising as the deadline nears to raise the U.S. debt ceiling. Mark Zandi discusses the latest development with NPR's The Takeaway.

Defining Default

Tue, 12 Jul 2011 14:54 GMT

Mark Zandi explains to Andrea Mitchell what will happen if the U.S. debt ceiling isn't raised.

Visit msnbc.com for breaking news, world news, and news about the economy

Another Disappointing Jobs Report

Fri, 8 Jul 2011 09:08 GMT

Hopes for better news on the U.S. jobs front were dashed as payrolls scarcely grew. Mark Zandi discussed the report with the CNBC crew:

Looking Up Down Under

Thu, 7 Jul 2011 08:05 GMT

Matt Circosta talks with Bloomberg about the robust Australian economy.

Dismal Scientist: Europe Edition Upgraded

Wed, 6 Jul 2011 17:19 GMT

We are pleased to announce that Dismal Scientist Europe Edition has been upgraded to better serve the needs of our international business subscribers.

Beginning this month, you’ll see substantially deeper real-time coverage and analysis of Europe’s major economies, including the euro zone as a single region. Our reporting now includes more than 100 of the region’s most important economic indicators, plus historical and forecast data for Germany, France, Italy, Spain, Russia , the U.K., and the Euro Zone.

Ensure you are getting the maximum benefit from these amazing features:

New Visitors: Start a Free Two Week Trial
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View our Expanded Coverage:

Country	Indicator
Euro Zone	Balance of Payments
Euro Zone	Business and Consumer Sentiment
Euro Zone	Conference Board Leading Indicators
Euro Zone	Consumer Price Index
Euro Zone	Credit Conditions
Euro Zone	ECB Monetary Development/Aggregates
Euro Zone	ECRI Future Inflation Gauge-Europe
Euro Zone	External Trade
Euro Zone	GDP
Euro Zone	Industrial Orders
Euro Zone	Industrial Producer Prices
Euro Zone	Industrial Production
Euro Zone	Manpower Employment Outlook Survey
Euro Zone	Monetary Policy
Euro Zone	Preliminary Consumer Price Index
Euro Zone	Provisional GDP
Euro Zone	Retail Trade
Euro Zone	Unemployment Rate
Euro Zone	ZEW Indicator of Economic Sentiment
France	Business Survey
France	Consumer Confidence
France	Consumer Price Index
France	Employment Situation
France	Fiscal balance
France	GDP
France	Household Consumption Survey
France	Industrial orders
France	Industrial Production
France	Jobseekers
France	Nonfarm Payrolls
France	Producer Price Index
France	Property prices
France	Trade balance
Germany	Consumer Price Index
Germany	Employment Situation
Germany	Foreign Trade
Germany	GDP
Germany	House Price Index
Germany	Ifo Business Climate Index
Germany	Industrial Production
Germany	Lending by Banks
Germany	Manufacturing Turnover and Orders Received
Germany	Preliminary GDP
Germany	Producer Price Index
Germany	Retail Sales
Germany	Vehicle Registration
Germany	ZEW Indicator of Economic Sentiment
Italy	Balance of Payments
Italy	Bank Lending Survey
Italy	Business Confidence
Italy	Consumer Confidence
Italy	Consumer Prices Index - Final
Italy	Employment
Italy	Employment Status Estimates
Italy	Foreign Trade
Italy	GDP
Italy	Government Finance
Italy	Industrial New Orders
Italy	Industrial Production
Italy	Preliminary GDP
Italy	Producer Price Index
Italy	Retail Sales
Russia	Business Confidence
Russia	Consumer Price Index
Russia	Foreign Trade
Russia	GDP
Russia	Government Finance
Russia	House Prices
Russia	Industrial Production
Russia	Monetary Policy
Russia	Reserve Fund
Russia	Retail Sales
Russia	Unemployment
Spain	Business Confidence
Spain	Consumer Confidence
Spain	Consumer Price Index
Spain	Foreign Trade
Spain	GDP
Spain	Government Finance
Spain	House Prices
Spain	Industrial Orders
Spain	Industrial Production
Spain	Lending by Banks
Spain	Producer Price Index
Spain	Retail Sales
Spain	Unemployment
U.K	Bank of England Minutes
U.K	BoE Lending to Individuals
U.K	Consumer Confidence
U.K	Consumer Price Index
U.K	ECRI Future Inflation Gauge-Europe
U.K	Employment Situation
U.K	Foreign Trade
U.K	GDP
U.K	GDP Final Estimate
U.K	Halifax Housing Price Index
U.K	Industrial Production
U.K	Manpower Employment Outlook Survey
U.K	Monetary Policy
U.K	Moody's Analytics Debt Service Ratio
U.K	Nationwide Housing Price Index
U.K	Producer Price Index
U.K	Public Finance
U.K	Retail Sales
OECD	Composite Leading Indicators
World	Moody's Analytics Survey of Business Confidence

More improvements are in the works. Look to Dismal Scientist for timely analysis and in-depth commentary on key economic issues from industrial production to consumer confidence to fiscal and monetary policy. And if you have any suggestions or questions, please contact us through help@economy.com.

Treasury Tea Leaves

Tue, 5 Jul 2011 10:47 GMT

Some early speculation about potential leadership changes at the U.S. Treasury Department.

And an update on the state of the debt-ceiling negotiations.

Time's Nearly Up: Raise the Ceiling

Mon, 27 Jun 2011 14:41 GMT

The following appeared in Sunday's Philadelphia Inquirer:

Moment of truth is at hand: Raise the debt ceiling limit

By Mark Zandi

Most times, the questions I'm asked as an economist are as wide-ranging as the groups I speak to. But these days, everyone asks the same questions: When will we get more jobs? Why aren't businesses hiring more? Where are the jobs going to come from? Can policymakers do anything to help?

Beneath these questions, of course, is the fear that more jobs aren't coming, ever. This is understandable. The recovery is two years old and the U.S. economy has added back fewer than 2 million of the almost 9 million jobs lost in the Great Recession. Even more worrisome, the number of people working today is about where it was in the late 1990s, though the working-age population and labor force have grown.

The result is painfully high unemployment and underemployment. The jobless rate is down from its double-digit peak, but it remains above 9 percent. The underemployment rate, which includes those who aren't working as much as they want to, is stuck at 16 percent. This represents an astounding 24 million Americans.

Nervousness about the job market runs even deeper than that. Among those who have jobs, more and more are unhappy with their employment situation but are afraid to act to change it. In a good labor market, lots of people quit jobs in hopes of finding a better one. That's not happening now. And of course, few who have jobs are seeing their pay grow very fast.

It may be difficult therefore to see how the job market will gain traction in the foreseeable future. Yet it will, most fundamentally because U.S. companies are in great financial shape. To be sure, big and midsize companies are doing a lot better than smaller ones, but as a group firms are profitable and have little debt. There is no longer a question that businesses can expand their operations and hire more, only a question of confidence.

The lack of confidence is in part a hangover from the Great Recession, which brought our biggest banks and businesses literally to their knees. The only salve for that nightmare is time.

The other weight on the collective psyche comes from the government's fiscal challenges. While Washington's response to the Great Recession saved us from a much worse fate, there is no such thing as a free lunch. Unless policymakers make major changes to government spending and tax policy soon, another major financial crisis is inevitable.

This is the crux of the matter. Given our seemingly dysfunctional political process, business executives can't see how the Obama administration and House Republicans will come to terms. Businesses won't cut workers because they don't know how this is going to play out, but they also won't hire more until the picture clears. Breaking the budget impasse is thus key to getting more jobs.

The moment of truth is at hand. Some form of budget agreement must be achieved to raise the debt ceiling by late July, or financial markets will unravel and take the economy with them. While some policymakers may not believe this, most do, and odds are we will get an agreement and the debt ceiling will be increased. Policymakers will only outline a route to fiscal sustainability, but that should be enough, at least until after the presidential election.

I expect this will prompt businesses to hire more soon, and that confidence will start to improve soon thereafter, but I could be wrong. We will know more by the fall; if the economy does not pick up, policymakers should consider doing more.

Most important, and doable politically, Washington can extend the current payroll tax holiday another year. This tax cut likely saved us from a double-dip recession this spring when gasoline prices spiked to near $4 a gallon. Extending the payroll tax cut through 2012 won't be cheap, but it will be a big help, particularly to hard-pressed working lower-income households.

Washington should also cut state governments a break on their busted unemployment insurance funds. States have borrowed from the feds to pay their share of UI benefits; unless they see some relief, they will have no choice but to raise taxes on businesses to pay Washington back. This burden will fall most heavily on firms that went through serious layoffs and are probably the most shaky.

Providing a bit more financial help to state and local governments would also help curtail their severe job cutting. Well over half a million teachers, firefighters, police, and other public employees have lost jobs over the last three years; without help another quarter-million will lose jobs over the coming year. Ending this job loss would go a long way to lifting the job market.

My expectations about our economic future are based on our historical experience. Our history strongly argues that when push comes to shove, we always find a way to do the right thing. I see no reason to expect otherwise now, as we debate the debt ceiling and how to create more jobs.

MORE: Mark chats online about the economy:

How To Spend the Peace Dividend

Thu, 23 Jun 2011 15:14 GMT

If the U.S. realizes a 'peace dividend' after withdrawing from Afghanistan and Iraq, where should the money go, and what will it accomplish? Mark Zandi comments in the New York Times on the lessons from the 1990's.

The U.S. economy would benefit enormously from a reduction of defense forces in Iraq and Afghanistan. The more than $1.2 trillion spent in those two countries over the past decade has exacerbated our fiscal problems and significantly impeded growth in jobs and output.

Simply cutting spending by half in Iraq and Afghanistan over the next decade would go a long way to reining in the U.S. deficit. .Freeing up these resources, especially now, would go a long way to reining in future deficits. For context, there is general agreement that the federal budget deficit must be reduced by some $4 trillion over 10 years to make the government’s fiscal situation sustainable. Simply cutting spending by half in Iraq and Afghanistan over the next decade would go a long way to achieving that goal, making other changes to government spending and taxes measurably easier.

When Will Things Get Better?

Wed, 22 Jun 2011 14:34 GMT

When will the economy improve? NPR's Planet Money boils down the case for a sort-of optimistic outlook.

Here Comes Ben

Wed, 22 Jun 2011 09:48 GMT

Markets await Chairman Bernanke's latest outlook, and any hints about the Fed's next move. Mark Zandi discusses on CNBC.

June Forecast Assumptions

Wed, 22 Jun 2011 08:39 GMT

Monetary policy

The Federal Reserve will wind down its quantitative easing efforts this month. The Fed’s balance sheet is thus peaking at close to $2.8 trillion, about $2 trillion greater than under more normal circumstances. While the Fed is not expected to engage in another round of QE, it will maintain its current balance sheet at least through the end of the year by purchasing enough Treasury securities to offset those that are maturing.

The end of QE should have little imme-diate impact on long-term interest rates. The link between QE and long-term rates is the proportion of the stock of Treasury debt that the Fed owns, not the proportion of Treasury bond issuance. When QE ends, the Fed will stop its purchases of Treasury issuance, but its share of the stock of Treasuries outstand-ing will not change, at least not for a while. Even though financial markets fully anticipate the end of QE this month, 10-year Treasury yields remain very low at close to 3%.

Despite the end of quantitative easing this summer, the Fed is not expected to raise rates until mid-2012. Key benchmarks necessary for the Fed to raise rates will be an unemployment rate that is firmly below 9% and falling steadily and core inflation that is above 1% and definitively accelerating. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, is likely to become the key target rate until the Fed has successfully drained the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 1% and will not normalize, to just over 4%, until early 2014.

Fiscal policy

There will be little progress in reducing the budget deficit in the current fiscal year; it will come in near $1.35 trillion in fiscal 2011, or 9% of GDP. This is about the same deficit as in fiscal 2010 and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

The better economy and the fading of the fiscal stimulus will result in a quickly declining deficit beginning in fiscal 2012. By fiscal 2014, it is expected to settle in near the so-called structural budget deficit—one consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the sustainable budget deficit, which is closer to 2% of GDP.

Policymakers are not expected to make significant progress reducing this structural deficit during the remainder of President Obama’s term. It is assumed that policymakers will find the political will early in the next presidential term to set out a credible path to a sustainable deficit. This will include both spending restraint and tax increases, primarily through elimination of deductions and credits.

Policymakers will have to find a way of increasing the federal government’s debt ceiling before early August. Without an increase, the Treasury will be forced to stop paying some of the government’s bills, and the needed spending cuts would be substantial. The economy would devolve back into recession under the weight of severe budget cutting, the stock market would swoon, and interest rates would rise. Given this scenario, it is ex-pected that policymakers will raise the ceiling after a period of brinksmanship.

U.S. dollar

The U.S. dollar is trading at the low end of the range that has prevailed since the financial panic hit three years ago. From a long-run perspective, the dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen and a bit overvalued against the British pound. The dollar is significantly overvalued against the yuan and is expected to depreciate by some 5% annually against the Chinese currency over the next five to six years. U.S. policymakers would like this to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this considering their view that this would be a problem for their export-oriented manufacturers.

On a long-run, broad trade-weighted basis, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and the U.S. remains far and away the global economy's largest and most stable economy and the predominant player in global trade; there is also no good alternative.

Energy prices

The price of a barrel of West Texas Intermediate crude oil has fallen back in recent weeks to near $100. Prices are still well above the less than $90 at the start of the year, before social unrest in the Middle East boiled over, but are well below the early-May peak of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009 during the depths of the recession to almost $150 per barrel in the summer of 2008.

The price of a barrel of WTI is now ex-pected to average closer to $100 per barrel this year, a significant change from the $90 previously assumed. Despite ample global supplies, there is a risk premium of about $10 per barrel built into oil prices that will take much of the year to fade away. This increase in assumed oil prices shaves almost 20 basis points off expected 2011 real GDP growth. The risk is for even higher oil prices, given the potential for unrest to spread to major producers such as Iran and Saudi Arabia.

Assuming that the worst of the unrest is at hand, oil prices are expected to settle back down below $100 per barrel by next year, closer to fundamental global demand and supply. Longer-run oil prices are expected to trend steadily higher given increasing demand from emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at just above $4 per million BTUs, and will have trouble keeping up with oil prices over the next several years.

May Forecast Assumptions

Tue, 21 Jun 2011 14:57 GMT

Monetary policy

The Federal Reserve is expected to follow through on its commitment to engage in quantitative easing through June 2011. The Fed has stated its intention to purchase $600 billion in Treasury securities in addition to the $300 billion needed to offset those securities that will run off the Fed’s balance sheet during this period.

Additional quantitative easing will not be necessary, as the job market continues to steadily gain and underlying inflationary pressures, while modest, are beginning to build. The end of QE should have little immediate impact on long-term interest rates. The link between QE and long-term rates is the proportion of Treasury debt that the Fed owns, not the proportion of Treasury bond issuance. When QE stops the Fed will end its purchases of Treasury issuance, but its share of the stock of Treasuries outstanding will not change, at least not for a while. Indeed, even though financial markets fully anticipate the end of QE in June, 10-year Treasury yields remain very low at close to 3.25%.

The Fed is not expected to raise rates until spring 2012. Key benchmarks for the Fed to raise rates will be an unemployment rate firmly below 9% and falling steadily, and core inflation that is above 1% and definitively accelerating. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, will likely be the key target until the Fed has successfully drained the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 2% and will not normalize, to just over 4%, until late 2013.

Fiscal policy

There will be little progress in reducing the budget deficit in the current fiscal year; the deficit appears set to come in near $1.35 trillion in fiscal 2011, around 9% of GDP. This is about the same deficit as last year, and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

The better economy and fading of fiscal stimulus measures will result in a quickly shrinking deficit beginning in fiscal 2012. By fiscal 2014 the deficit will settle in near the so-called structural budget deficit—consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the so-called sustainable budget deficit, which is closer to 2% of GDP.

Policymakers will not make significant progress reducing this structural gap during the remainder of President Obama’s term. This will leave dealing with the nation’s daunting long-term fiscal challenges to the next president, whoever that might be, and Congress. It is assumed that policymakers will find the political will early in the next presidential term to set out a credible path to a sustainable deficit, including cuts to discretionary spending and entitlement programs and tax increases.

Policymakers will have to find a way of increasing the federal government’s debt ceiling before early August. Without an increase by then, the Treasury will be forced to make substantial spending cuts. The economy would devolve back into recession under the weight of severe budget cuts, a stock market decline, and higher interest rates. Given this, it is expected that policymakers will raise the ceiling after a period of brinksmanship.

U.S. dollar

The U.S. dollar is trading at the low end of the range that has prevailed since the financial panic hit three years ago. Temporary ups and downs notwithstanding, from a long-run perspective the dollar is currently modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by some 5% annually over the next five or six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this because of their view that it would be a problem for their export-oriented manufacturers.

On a broad, trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns that the dollar will experience a rapid broad-based depreciation are overdone. The dollar accounts for nearly two-thirds of global reserves, and the U.S. remains far and away the global economy’s largest and most stable economy and the predominant player in global trade.

Energy prices

Oil prices have fallen back in recent weeks to near $100 for a barrel of West Texas Intermediate crude. Prices are still well above the less than $90 that prevailed at the start of the year before the turmoil in the Middle East, but are well below the early May peak of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 a barrel at the start of 2009 during the depths of the recession, to a record of almost $150 in the summer of 2008.

The price of WTI is expected to average closer to $100 per barrel this year. This is a significant change from the $90 average assumed earlier this year. While global oil supplies are still ample, a risk premium of approximately $10 per barrel has been built into prices, and it will take much of the year to fade away. These higher assumed oil prices will shave almost 20 basis points off expected 2011 real GDP growth, and the risk to the outlook is for even higher prices.

Natural gas prices remain low, particularly compared with oil prices, at near $4 per million per BTUs, and will have trouble keeping up with oil prices during the next several years.

Live from New York

Mon, 20 Jun 2011 09:59 GMT

On Monday, June 20, Mark Zandi and other experts dissected the outlook in a panel discussion at the New York Forum.

Watch live streaming video from nyforum at livestream.com

Midyear Reassessment

Thu, 16 Jun 2011 08:52 GMT

Given the recent spate of disappointing data, are there any reasons for optimism? Mark Zandi discusses with CNBC.

Parsing the Pause in Growth

Mon, 13 Jun 2011 14:42 GMT

Is the slowdown transitory? Mark talks with Bloomberg News about confidence and the recovery.

Buy or Rent?

Wed, 8 Jun 2011 08:29 GMT

As U.S. housing appears to be nearing the bottom of its long slide, it may be time to reconsider the math of ownership. Mark Zandi talks with NPR.

Digging Out Takes Time

Fri, 3 Jun 2011 12:35 GMT

After the release of May's U.S. employment numbers Friday, Mark Zandi spoke with CNN's "In the Arena" :

Friday morning, the Department of labor released May’s employment report and the news isn’t great. The economy gained a mere 54,000 jobs in the month, a significant slowdown from 232,000 jobs added to payrolls in April. What‘s happening?

The sharp slowing in job growth this spring is largely due to the impact of the surge in gasoline and food prices, fallout from the Japanese catastrophe on U.S. manufacturers, and the resumption of house price declines resulting from the ongoing foreclosure crisis. The impact of these factors on jobs is being magnified by the very fragile collective psyche. Everyone has been through a lot in recent years and it doesn’t take much to push us over the proverbial edge.

President Obama, members of Congress, declared candidates for the 2012 election relentlessly talk about the need for more jobs. Unless the government creates more jobs—unlikely in this time of budget cutting—where will hundreds of thousands of jobs so desperately needed come from?

I expect job growth will reaccelerate later this fall. U.S.companies are very profitable and their balance sheets are about as strong as they have ever been; it is not a question of whether businesses can hire more it is a question of their willingness.

Assuming oil prices don’t spike higher again and policymakers don’t misstep with regard to raising the debt ceiling limit, then I think businesses will slowly get their groove back and pick-up their hiring. The job gains will be broad-based across industries, including manufacturing, transportation and distribution, professional services, healthcare, retailing and leisure and hospitality.

Republicans in Congress are demanding deep spending cuts in return for raising the $14.3 trillion U.S. debt ceiling, something the administration says must happen by early August. From your point of view, how important is this battle to Americans who are worried about their mortgages, their jobs and sending their kids to college? Do you think the debt limit should be raised?

It is absolutely vital for Congress and the Administration to come to terms and to raise the debt limit in the next few weeks. If they don’t do this by late July, then stock and bond markets will weaken, and if they don’t by early August, the economy will be thrown into another recession. Our fiscal problems will quickly become even worse. I am hopeful policymakers will be able to work this out soon, but with each passing day I grow more worried that I am wrong.

And I’m not the only one. Investors and the rating agencies are signaling their growing angst over the process.

May's Jobs Breakdown

Fri, 3 Jun 2011 10:00 GMT

U.S. employment faltered last month. Gasoline prices and supply-chain issues were part of the problem, but what else is wrong? Mark Zandi discusses with the CNBC crew.

Where is Housing Headed?

Tue, 24 May 2011 13:05 GMT

Home sales remain weak, and prices have farther to fall. There's light at the end of the tunnel, but it's a long tunnel. Mark Zandi explains why to Bloomberg.

UPDATE: Mark has posted a policy paper on the need to help U.S. housing get out of its slump

Reasons for Optimism�and Caution

Fri, 13 May 2011 08:56 GMT

Pete Davis blogs on Mark Zandi's talk before the National Economists Club. An excerpt:

He expects 3% real GDP growth this year, like last year, and 4% next year. "There won't be a lot of progress on the unemployment rate this year [currently 9.0%] because of labor force growth from people returning to the job market"...

...In the Q&A, Zandi estimated state and local fiscal travails would put a 0.4% drag on the economy this year. Normally, it adds 0.25% to the economy. This year, state and local governments will cut about 500,000 jobs, and they are expected to cut another 250,000 jobs going forward.

Before the recession, the non-accelerating inflation rate of unemployment (NAIRU) was about 5%. It is somewhere between 5.5% and 6% now with increased numbers of long-term unemployed.

UPDATE: An audio excerpt of Mark's talk at the NEC is here.

Is Another Housing Crash Coming?

Wed, 11 May 2011 11:00 GMT

Mark Zandi talks with the New York Times' David Leonhardt about the U.S. housing market's current woes:

Q. I’m struck at how much higher the rent ratio still is in many places, relative to its average from 1990 to 2010. It’s about 18 in Washington (relative to a 1990-2010 average of 13), about 17 in Boston (relative to 15) and 15 across all metropolitan areas (relative to 11). Is there any reason to think the ratio should remain higher in the future than it was in the not-too-distant past? Or should we expect the ratio to continue falling in coming years, either through further house-price declines or through rent increases?

A: I expect the house-price-to-rent ratio to continue falling at least through the remainder of this year and next. National house prices are set to decline by 5 percent this year, and apartment rents are on track to rise by about 5 percent. I do expect house prices to stabilize in 2012, but rents will continue to rise strongly.

Supporting the strong rent growth is declining apartment vacancy rates. Apartment demand is healthy given the better job market and accelerating household formation, particularly among younger households that generally rent, and the ongoing foreclosure crisis which is forcing families from home ownership into renting. Apartment construction is also especially low by historical standards. If this script roughly holds, the house-price-to-rent ratio will be back close to its long-run average in most areas of the country by 2013.

Forecast Assumptions

Mon, 9 May 2011 08:49 GMT

Monetary policy

The Federal Reserve is expected to follow through on its commitment to engage in quantitative easing through June. The Fed will complete its purchase of $600 billion in Treasury securities, in addition to the $300 billion needed to offset those securities that will run off the Fed’s balance sheet during this period. Despite the recent firming in core inflation and the decline in the unemployment rate, policymakers are also expected to maintain their current zero interest rate policy until early 2012.

However, additional quantitative easing will not be necessary, as the job market is steadily improving and underlying inflationary pressures are beginning to build. This will be a relief to Fed policymakers given the withering criticism they have received from global central banks fearful of the economic implications of their appreciating currencies, fixed income investors worried about accelerating inflation, and Congressional Republicans concerned that the Fed is overstepping its mandate and conducting a form of fiscal policy.

While the criticisms are largely overdone, QE does complicate the Fed’s eventual exit strategy from its highly stimulatory monetary policy. The size of the Fed’s balance sheet is expected to peak in mid-2011 at more than $2.5 trillion, up from $800 billion prior to the start of the financial panic in 2007. It will be difficult for the Fed to reduce this hefty balance sheet without fueling uncomfortably high inflation at some point.

Despite the economy’s better prospects, the Fed is not expected to raise rates until the spring of 2012. When policymakers do begin raising rates, the interest rate on reserves, not the federal funds rate, will likely be the key target rate until the Fed successfully drains the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 2% and will not normalize, to just over 4%, until late 2013.

Fiscal policy

There will be little progress in reducing the budget deficit in the current fiscal year; the deficit appears set to come in near $1.3 trillion in fiscal 2011, equal to 9% of GDP. This is about the same deficit as in fiscal 2010 and is only a bit less than the record $1.4 trillion deficit, or 11% of GDP, in fiscal 2009.

Adding to this year’s deficit is the tax cut deal the Obama administration reached with Republican congressional leaders late last year. While fiscal policy will still not add to economic growth this year, especially after recent spending cuts, at least it will not be much of a drag. By delaying any fiscal drag, the deal helps ensure that the fragile economic recovery will soon evolve into a sturdy expansion.

A much better economy and the fading of the fiscal stimulus will result in a quickly improving deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near the so-called structural budget deficit—the deficit consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the so-called sustainable budget deficit, which is closer to 2.5% of GDP.

Given the divided government, it is assumed that policymakers will not meaningfully address this gap during the remaining two years of President Obama’s term. It is assumed that policymakers will find the political will early in the next presidential term to set out a credible path to a sustainable deficit. This will include both spending cuts and tax increases.

U.S. dollar

The U.S. dollar is trading in the fairly tight range that has prevailed since the financial panic hit almost three years ago. From a long-run perspective, the dollar is roughly appropriately valued against the euro, somewhat overvalued against the British pound, and a bit undervalued against the Japanese yen and Canadian dollar.

On a broad, trade-weighted basis across all currencies and over the long run, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone given that the dollar accounts for nearly two-thirds of global reserves, and that the U.S. remains far-and-away the global economy’s largest and most stable economy.

Energy prices

Oil prices have surged recently because of the mounting turmoil in the Middle East. West Texas Intermediate crude oil is trading well over $100 per barrel, and Brent is trading closer to $120 per barrel. WTI is expected to average close to $100 per barrel this year, a significant change from the $90 per barrel average assumed earlier in 2011. While the unrest has not yet had a significant impact on global oil supplies and is not expected to, a risk premium of approximately $10 per barrel has been built into oil prices; it will take most of the year for this to fade away.

The risk to the oil price outlook is weighted toward even higher prices. It is impossible to gauge whether the civil unrest will spread to major oil producers such as Iran and Saudi Arabia.

Assuming that the worst of the unrest is at hand, a barrel of WTI is expected to settle back down below $100 by next year. Longer run, oil prices are expected to trend steadily higher, at a pace above overall inflation.

Natural gas prices remain low, particularly compared with oil prices, at near $4 per million BTUs, and will have trouble keeping up with oil prices over the next several years.

U.S. Jobs: Did Somebody Flip a Switch?

Fri, 6 May 2011 09:30 GMT

Mark Zandi and the CNBC crew analyze the big April surprise in U.S. job growth.

Visit msnbc.com for breaking news, world news, and news about the economy

Bin Laden's Toll

Tue, 3 May 2011 12:05 GMT

Washington Post columnist Ezra Klein has some sobering thoughts about what Bin Laden did to the U.S. -- or rather, caused us to do to ourselves.

For bin Laden... success was not to be measured in body counts. It was to be measured in deficits, in borrowing costs, in investments we weren’t able to make in our country’s continued economic strength. And by those measures, bin Laden landed a lot of blows.

To which Mark Zandi adds:

It is an excellent point. 9/11 set off a chain of events that is costly at least $250 billion a year ($150 billion in Iraq and Afghanistan) and another $100 billion on homeland security by government and businesses. That's pretty close to what policymakers say our spending cut goal should be over the next decade.

Dealing With the Deficit

Fri, 29 Apr 2011 10:41 GMT

Will Washington manage a graceful resolution? Mark Zandi discusses with Bloomberg News.

Bernanke's Press Conference

Wed, 27 Apr 2011 14:14 GMT

More Pain at the Pump

Tue, 26 Apr 2011 08:42 GMT

Gasoline prices are again becoming a preoccupation of consumers and forecasters. Mark Zandi talks with Fox Business News.

Rent or Buy?

Mon, 18 Apr 2011 12:22 GMT

NPR's Planet Money team came around last week looking for some data that can help guide the choice of renting versus owning. We provided some, which they've put into a helpful format on their blog. Excerpt:

How much do houses cost relative to income?

This is called the price-to-income ratio. It's the median home price divided by median household income.

During the boom, this ratio shot way up, as home prices rose faster than incomes. Now, it varies from place to place: In some cities it's higher than historical norms, suggesting home prices have further to fall. In others, it's lower, suggesting houses are a good buy...

Budget Sanity

Sun, 17 Apr 2011 21:51 GMT

Princeton University economist Alan Kreuger, who is slated to appear as a guest speaker at next month's Moody's Analytics Economic Outlook Conference, penned an op-ed for The New York Times this past weekend. An excerpt:

A Shot at a Sane Budget

PRESIDENT OBAMA has been criticized as too slow to engage in major debates and too timid to make difficult decisions.

Some have argued that his budget speech last week fit that narrative. He waited to deliver his speech until five months after his own fiscal commission proposed steep cuts to spending and tax deductions to bring the deficit under control, and a week after Representative Paul D. Ryan, the Wisconsin Republican who leads the House Budget Committee, proposed to replace Medicare with a voucher-like program for those now under age 55.

In one important respect, however, Mr. Obama’s deficit speech disproves the caricature, and contains a bold, serious and timely proposal...

What I have in mind is his endorsement of a trigger that would automatically kick in to reduce spending and tax expenditures if Congress and the administration fail to bring the debt under control...

In essence, Mr. Obama proposed a rule that will enable us to get ahead of the long-run budget problem, and provide predictability and certainty to the federal budget.

The Uses of Brinksmanship

Sun, 17 Apr 2011 21:38 GMT

The following was published in The Philadelphia Inquirer, Sunday April 17.

by Mark Zandi

It is easy to be gloomy about our nation's fiscal problems. The federal government narrowly averted a shutdown over the 2011 budget and it looks as if lawmakers plan to play chicken over the fast-approaching national debt ceiling. These same lawmakers must soon reach agreement on long-term government spending and tax policy, or the nation will suffer fiscal and economic ruin. Yet I'm optimistic.

Lifting the debt ceiling by July 4 is absolutely vital; otherwise the Treasury will be unable to borrow and be forced to slash spending. As it happens, the gap between federal revenue and expenses reaches its deepest point of the year in mid-July, nearly $6 billion per day. The Treasury will pay its bills until nothing is left, then simply stop.

No government function will be spared. Never mind keeping national parks open or funding Planned Parenthood; in question will be payment for our soldiers, Social Security and Medicare checks, food stamps, and unemployment insurance. There is even debate about whether the government will miss interest and principal payments on its debt. Such a default would send global financial markets into turmoil, drive interest rates skyward, and cause stock and house prices to crash.

The scenario is so scary as to be unimaginable, and thus is not possible, in my view. More likely, something positive will emerge from all the brinksmanship. In late 1995 and early 1996, when the government last shut down, policymakers averted calamity by making significant reforms to Social Security.

This time, policymakers could agree to change the budget process. President Obama last week called for automatic spending cuts and tax increases if the federal deficit hasn't narrowed sufficiently by the middle of this decade. Even Republicans might find this appealing.

But changing only the budget process won't come close to adequately addressing our long-term fiscal problems. That requires fundamental changes to spending and tax policy.

The good news is that a political consensus is forming between the rational right and rational left. Two bipartisan commissions have now concluded that both spending cuts and tax increases are necessary, and that the biggest part of deficit reduction should come from less spending. Historical experience suggests that countries that tackle their fiscal problems by spending less see their economies perform better in the long run.

Besides freezing discretionary spending, Congress must put entitlement programs on solid financial ground, permanently. Indexing the Social Security retirement age to longevity, means-testing benefits, and tying them more accurately to inflation are all ways to do this. The changes should not affect those nearing retirement, who counted on the current system in their planning. But younger workers have decades to make the necessary adjustments.

Tax reform, meanwhile, should focus on reducing tax expenditures - those exclusions, exemptions, deductions, and credits that currently cost the federal government close to $1.2 trillion per year. The mortgage-interest deduction is among the largest of these, but hundreds of other loopholes indirectly pay for tuition, health insurance, child care, local property taxes, and so on. From an economic perspective, there is no difference between eliminating tax loopholes and cutting government spending; the result is the same.

Limiting tax expenditures could raise enough revenue to allow lower marginal tax rates for individuals and corporations. This might help end the decade-old political war over tax rates for those making more than $250,000 a year. It would also make U.S. firms more globally competitive and likely to invest and hire at home.

I'm not saying any of this will be easy; policymakers will almost surely need a push from markets. Interest rates are still low, suggesting the global investors who buy U.S. government debt don't mind our fiscal mess. But their patience stems largely from the lack of alternatives. Europe and Japan have fiscal problems worse than ours and emerging economies are too small to absorb all the available global cash. This won't last. Indeed it may take higher interest rates to convince Americans and their representatives that there is no alternative to solving the nation's fiscal problems.

Even then, it will take political courage to get the job done. Whoever is in charge after the next election will need to show a clear willingness to both raise taxes on the middle class and impose cuts on the future growth of Social Security and Medicare. Supporters will rebel, as did supporters of President George H.W. Bush when he backtracked on his "read my lips" pledge. Bush didn't get a second term, but his brave move led to a federal budget surplus a decade later.

No leader can really change anything without being willing to give up everything. Our nation has overcome many daunting challenges, mostly because we had leaders who put the nation's future ahead of their own. It is time for our current leaders to do the same, and I'm optimistic they will.

The Booming 1930s

Tue, 12 Apr 2011 12:29 GMT

The New York Times' David Leonhardt interviews Alexander J. Field, an economist at Santa Clara University and author of “A Great Leap Forward,” which argues that the Great Depression actually set the stage for the post-World War II boom.

Field: In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input. Almost all of the increase in output per hour is attributable to technological and organizational advance. As I said in the title of my 2003 American Economic Review article, the 1930s were indeed the most technologically progressive decade of the century...

A number of products available in the 1920s moved from low-penetration boutique goods to mass-produced commodities. Case in point: mechanical refrigerators. Less than 3 percent of U.S. households had them in 1929, and they were expensive and unreliable, requiring extensive after-market service. In 1941, 44 percent of households had mechanical refrigeration, including 56 percent of urban households....

An Encouraging U.S. Jobs Report

Fri, 1 Apr 2011 16:38 GMT

At long last, the monthly payroll count is beginning to reflect recovery. Mark Zandi joined the CBNC crew to discuss.

Before the Senate

Tue, 29 Mar 2011 15:09 GMT

Testimony on the future of housing and mortgage finance before the Senate Banking Committee.

The video is here. (Mark Zandi's testimony begins about 30 minutes in.)

Calendar Note: Housing Finance on Deck

Wed, 23 Mar 2011 12:11 GMT

This just in from Housing Wire:

Senate set to hear proposals for housing finance future

The Senate Banking Committee will hear proposals March 29 for replacing Fannie Mae and Freddie Mac in a new housing finance system... [The committee] will hear testimony from three influential policy shapers.

The first will be Mortgage Bankers Association Chairman Michael Berman, who supported the white paper when it was released. The MBA's own proposal, released more than one year ago, includes a return of private capital, while the government would continue to explicitly guarantee lower-risk mortgage-backed securities.

Janneke Ratcliffe, a senior fellow for the Center for American Progress, also will testify. In January, the group released its own proposal, as well, that would set up chartered mortgage institutions guaranteeing principal and interest payments on MBS. These CMIs would outnumber the previous GSEs and would be private institutions.

Finally, Moody's Analytics Chief Economist Mark Zandi will offer his proposal to the senators. Just before the Treasury white paper came out, Zandi released one of his own. In Zandi's hybrid housing system, the private sector would fund most of the mortgages in the country, but the market would be guaranteed against catastrophe by the government.

Aftershocks and the U.S. Economy

Tue, 22 Mar 2011 10:16 GMT

The following appeared in Sunday's Philadelphia Inquirer

by Mark Zandi

The U.S. economy can’t seem to catch a break. Just as the recovery was set to hit its stride, new threats emerged: Unrest in the Middle East has caused oil prices to surge, and Japan’s unfolding natural disaster has hung a cloud of uncertainty over financial markets. While the economy has enough going for it to weather these problems reasonably well, it could suffer a significant setback if anything else goes wrong.

Few things are worse for the U.S. economy than high energy prices. As more consumer cash is spent on gasoline, less is available for everything else. High energy prices act as a tax increase, and a particularly pernicious one at that: While your tax dollars pay for useful services such as education and roads, money spent on gasoline goes primarily to foreign oil producers, doing little economic good at home.

The increase in the gasoline “tax” to date has been substantial. Even if prices don’t rise beyond their current level — around $3.50 a gallon — U.S. consumers will spend an extra $60 billion on gas this year. This is equivalent to about half the savings from this year’s temporary reduction in the payroll tax, which was passed when lawmakers agreed to extend the Bush-era tax cuts last year.

Higher gasoline prices are particularly hard on low- and middle-income households, which spend a relatively large share of their budgets on energy.

Policymakers have no effective response to higher energy prices. The Federal Reserve faces a dilemma: Should it try to shore up the weakened economy by lowering interest rates as energy costs rise, or should it respond to the added inflation pressure by raising interest rates? Because neither option is clearly preferable, the central bank will likely do nothing.

The unpredictability of events in the Middle East, and therefore of energy prices, is even more disconcerting. Unrest in either Iran or Saudi Arabia — which are among the world’s largest oil producers — would send prices further skyward. If gasoline rose above $4 a gallon for more than a couple of months, it would likely be too much for the economy to bear, bringing on another recession.

It’s also impossible to know how the disaster in Japan will play out. The earthquake and tsunami were a huge blow to that country, but if history is a guide, the resilient Japanese will rebuild quickly. It took Japan’s economy no more than a year to recover from the 1995 earthquake in Kobe.

Japan will probably need more U.S. agricultural goods, food products, and pharmaceuticals after the disaster, which would boost the American economy. In the same vein, Japanese auto, semiconductor, and computer manufacturers can fairly quickly shift production to the United States, where they still have excess capacity.

There has been some hand-wringing in the financial markets over the possibility that Japanese institutions could sell their substantial holdings of U.S. Treasury bonds, sending interest rates here higher. But this concern is overblown. The amounts involved are modest, and both the Federal Reserve and the Bank of Japan are committed to buying lots of U.S. bonds.

Of course, it is easy to envision darker scenarios if Japan’s unfolding nuclear problem becomes catastrophic. Just contemplating this possibility has sent global stock prices down sharply. And it is already clear that the events in Japan will seriously alter the global energy landscape. This is a major setback for the nuclear power industry, and fossil fuels will have to fill the void for the foreseeable future. That means even more upward pressure on oil prices.

Assuming that the unrest in the Middle East has peaked and that the Japanese nuclear crisis ends without a major radiation disaster, the U.S. economy will continue to gain traction and recover. U.S. companies as a group are very profitable, and their balance sheets are strong. Whether they can invest and hire more is no longer in doubt; the issue is their willingness to do so. With the Great Recession fading from memory, and uncertainty abating after last year’s epic debates over health care, financial regulation, and tax policy, businesses should grow bolder and expand more aggressively.

But that’s provided nothing else goes wrong. Confidence remains fragile among business managers, and it won’t take much to push them back into their shells.

Congress and the Obama administration can’t risk a misstep. Given the improved economy and our daunting fiscal challenges, policymakers are rightly moving from fiscal stimulus to fiscal restraint. But government spending can’t be cut too deeply or too soon. As recent events show, the economic coast is not clear.

The Wave from Japan

Thu, 17 Mar 2011 15:50 GMT

Unless Japan's nuclear power mishap worsens severely, there's little reason to fear an economic spillover in the U.S., Mark Zandi tells CNBC.

MZ: "...The U.S. and global economies will not be materially impacted by the Japanese disaster, assuming of course that the nuclear crisis abates without any significant spillage of radioactive material.

The principal linkages between Japan and the U.S. global economies are trade, financial markets, and commodity markets. The U.S. trade balance with Japan will not be significantly impacted. U.S. exports to Japan will suffer somewhat, but mitigating the impact is that the U.S. exports things the Japanese will need more of including agricultural and food products and pharmaceuticals. Moreover, U.S. imports from Japan will also weaken as Japanese producers will shift some production of vehicles, semiconductors and computers to the U.S. where Japanese companies have excess capacity.

Interest rates will not be materially impacted as the Bank of Japan is upping its quantitative easing and the Federal Reserve is now much more likely to complete QE2. The Japanese disaster will take the edge off of oil and other commodity prices, at least temporarily, as Japanese demand for commodities will be weaker with the weaker economy..."

More ...

Did the Stimulus Work?

Wed, 9 Mar 2011 08:41 GMT

The federal stimulus program passed early in 2009 has become a favorite target for opponents of the Obama administration's economic policies. A frequent assertion on Sunday talk shows and elsewhere is that the stimulus failed to prevent the U.S. unemployment rate from rising. But such talk blurs the facts. There were indeed some forecasts that misjudged the trajectory of U.S. joblessness—one in particular that the White House Council of Economic Advisers came to regret.

But not all predictions of the stimulus' impact were as far off the mark. In January of 2009, Mark Zandi testified that if the then-pending stimulus legislation were passed:

"...there will be 3 million more jobs and the jobless rate will be more than 1.5 percentage points lower by the end of 2010 than without any fiscal stimulus. Without a stimulus, unemployment will rise well into the double digits by this time next year, and the economy will not return to full employment until 2014."

That testimony included the following projections:

Note the forecast was based on a proposal for some $825 billion in stimulus spending; the final bill was around $780 billion. As the table shows, unemployment was projected to average 9.51% in 2010. As it happened, according to the Bureau of Labor Statistics, unemployment in 2010 averaged 9.63%.

How High for Oil?

Mon, 7 Mar 2011 12:46 GMT

Geopolitical unrest raises the risks of another spike, which could mean some unpleasant consequences for the economy. CNBC asked Chris Lafakis to elaborate.

Oil continues to climb as fighting in Libya intensifies, how high do you think it will go?

CL: WTI crude oil futures have risen from $86.20 to $104.72 while we have lost less than 1% of global crude oil production. Since economic analysis suggests that oil prices should rise by a lot less than 21.5 percent given a 1 percent reduction in oil supply (that has since been filled by Saudi by the way), we can be sure that there is a significant supply uncertainty premium currently embedded in the price of oil. It is difficult to predict when this premium will evaporate, but rest assured it will at some point. A supply uncertainty premium of this magnitude is unsustainable. I would be very surprised if WTI prices pierced $110.

Heating oil is going up as well as gasoline, what kind of impact will this have on the economy as consumers get squeezed?

CL: Rising heating oil and diesel prices do about 44 percent as much damage as rising gasoline prices. The $18.50 increase in oil prices that we’ve experienced over the past couple weeks will, if sustained over the course of a year, cost consumers $20.4 billion just in higher home heating oil and diesel costs. It will costs consumers $46.3 billion in higher gasoline costs if sustained over a year. That’s equivalent to more than a third of the $120 stimulus that we got from the payroll tax reduction in the tax compromise last December.

Employment: Behind the Headlines

Sun, 6 Mar 2011 10:59 GMT

Behind the top-line jobs report: Mark Zandi explores the numbers for Bloomberg.

Better News on Employment

Fri, 4 Mar 2011 09:59 GMT

U.S. payrolls made up ground in February, giving hope for faster job growth ahead. Mark Zandi helped CNBC parse the data.

When to Cut the Budget

Wed, 2 Mar 2011 14:50 GMT

Mark Zandi explains to Bloomberg why it makes sense to delay government budget cuts until the economy is stronger.

Jobs and Budget Cuts: How Big an Impact?

Wed, 2 Mar 2011 11:43 GMT

Debate is raging today both on and off Capitol Hill about the economic impact of proposed federal budget cuts. Even NPR, not normally a fount of in-depth economic reporting, gives the issue a pretty good airing.

GOP Budget Cuts: Job Killer Or Necessary Step?

by Liz Halloran

The debate over whether deep federal spending cuts would slow the nation's economic recovery intensified this week.

One side says job losses will grow as government spending shrinks, while the other insists private jobs will flourish only when government retreats.

Supporters from each side cranked up the volume after Mark Zandi, chief economist at Moody's Analytics, released a report that predicts GOP spending cuts would lead to job losses of up to 700,000 through 2012.

Zandi's assessment came on the heels of a new Goldman Sachs analysis suggesting that the GOP deficit reduction plan would shave 2 percentage points from the gross domestic product, a measure of the value, including government spending, of all goods and services produced in the country. Most economists predict GDP will grow about 3 percent this year, a reasonably healthy pace. If the figure were to fall to 1 percent, the labor market would suffer.

Some conservative economists argue that potential job losses are being overstated and that a credible plan to begin paring down the nation's historic deficit would help job growth. It could do that by reducing market uncertainty and encouraging private investment.

To define the arguments of both sides — and to get an idea of common ground on which deficit hawks and doves could come together — we put questions to two prominent economists...

Read the whole thing.

Forecast Assumptions

Tue, 1 Mar 2011 12:26 GMT

Monetary policy. Monetary policy is expected to remain highly stimulatory throughout 2011. The Federal Reserve’s current zero interest rate policy will stay in place into 2012, and the Fed will complete its stated intention to purchase $600 billion in Treasury securities by June; this is in addition to the $300 billion that will be needed to offset those securities that will run off the Fed’s balance sheet during this period. A stubborn nearly double-digit unemployment rate and core inflation that is firmly below 1% are behind policymakers’ aggressive stance.

However, additional quantitative easing will not be necessary, as the unemployment rate will be moving definitively lower by this summer and core inflation has already begun to stabilize. This will be a relief to policymakers, given the withering criticism they have received from other central banks over currency concerns, fixed income investors fearful of accelerating inflation, and congressional Republicans who say that the Fed is overstepping its mandate.

While these criticisms are largely overdone, QE does complicate the Fed’s eventually exit strategy from its highly stimulatory monetary policy. The size of the Fed’s balance sheet is expected to peak in mid-2011 at more than $2.5 trillion, up from $800 billion prior to the start of the financial panic in 2007. It will be difficult to reduce this hefty balance sheet without fueling uncomfortably high inflation at some point.

The Fed is not expected to raise rates until the spring of 2012. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, is likely to become the target rate. The interest rate on reserves is expected to end 2012 at 2% and will not normalize to just over 4% until late 2013.

Fiscal policy. There will be little progress in reducing the budget deficit in the current fiscal year; it appears set to come in above $1.3 trillion in fiscal 2011, 9% of GDP. This is about the same as in fiscal 2010 and only a bit smaller than the record $1.4 trillion fiscal 2009 deficit.

Adding to this year’s deficit is the late 2010 budget deal between the Obama administration and Republican congressional leaders. The major provisions include the extension of current personal income tax rates for two more years, the extension of the emergency unemployment insurance program through the end of this year, a sizable payroll tax cut, and the expensing of any business investment. The size of the deal was a surprise, and while fiscal policy will still not add to economic growth this year, at least it will not be much of a drag; thus the fragile economic recovery will soon evolve into a sturdy expansion.

A much better economy and the fading of fiscal stimulus measures will result in a quickly narrowing deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near the “structural” budget deficit—that consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the long-run sustainable deficit of around 2.5% of GDP. Given the current divided government, it is assumed that policymakers will not meaningfully address this budget gap until 2013.

U.S. dollar. The U.S. dollar continues to trade in the fairly tight range that has prevailed since the financial panic hit almost three years ago. Notwithstanding the temporary ups and downs, from a long-run perspective the dollar is roughly appropriately valued against the euro, somewhat overvalued against the British pound, and a bit undervalued against the Japanese yen and Canadian dollar.
The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate 5% annually over the next five or six years. U.S. policymakers would like this to occur much more quickly given the very wide trade deficit with China, but the Chinese are unlikely to accommodate this, fearing it would be a problem for their export-oriented manufacturers. With the dollar overvalued against the yuan by some 30%, the risk of protectionist sentiment boiling over is uncomfortably high.

On a broad trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns that the dollar will experience a rapid broad-based depreciation are overdone.

Energy prices. Oil prices have surged in recent weeks with the turmoil in the Middle East. A barrel of West Texas Intermediate crude is trading well above $100. Over the past two years prices have ranged from $40 at the start of 2009 during the depths of the recession to a record of almost $150 in the summer of 2008.

The price of oil is now expected to average closer to $100 this year, a significant change from the previously assumed $90. While the unrest has not significantly restricted global oil supplies, and is not expected to, a risk premium of about $10 per barrel has been built into prices, which will take much of the year to fade away. This increase in assumed oil prices shaves almost 20 basis points off expected 2011 real GDP growth. The current risk to the outlook is for even higher prices, based on the potential for civil unrest to spread to major oil producers such as Iran and Saudi Arabia.

Assuming that the worst of the unrest is at hand, oil prices are expected to settle back down below $100 per barrel by next year. Longer-run oil prices are expected to trend steadily higher, increasing at a pace above the overall rate of inflation.

Natural gas prices remain low, particularly compared with oil prices, at nearly $4 per million BTUs, and they will have trouble keeping up with oil prices over the next several years. A very substantial glut of natural gas has developed as demand has not fully recovered from the recession, and supply has increased in response to the very high prices of 2008. Prices are expected to eventually gain traction as cheaper gas attracts alternative uses.

Washington's Budget Battle

Tue, 1 Mar 2011 08:18 GMT

Mark Zandi tells CNBC's Kudlow & Co. why shrinking the federal deficit is good for the economy, but a rush to slash spending isn't.

Behind the Spike in Oil Prices

Sun, 27 Feb 2011 17:37 GMT

Mark Zandi helps CNN understand how unrest in the Middle East hits U.S. consumers and businesses.

New Zealand's Earthquake: Counting the Cost

Fri, 25 Feb 2011 15:36 GMT

Matt Robinson helps assess the economic damage of New Zealand's latest natural disaster for the Australia Network.

How High for Oil?

Thu, 24 Feb 2011 08:17 GMT

Chris Lafakis helps CNBC gauge the impact of Middle Eastern unrest on U.S. pocketbooks.

Oil, Austerity and the U.S. Recovery

Wed, 23 Feb 2011 12:39 GMT

On Bloomberg, Mark Zandi connects the dots from Mideast oil to Midwest budget battles to the pace of U.S. recovery.

And on NPR's Marketplace, Mark discusses the state of budget negotiations in Washington.

More About Obama's Budget

Tue, 22 Feb 2011 08:24 GMT

The following appeared in the New York Daily News, Saturday Feb. 19:

It won't be easy, but President Obama must address the federal deficit sooner, not later

By Mark Zandi

As economists like to say, there's no such thing as a free lunch. Policymakers had no choice but to respond to the financial panic and the Great Recession with the Troubled Asset Relief Program (TARP), a massive fiscal stimulus and easy money. If they hadn't, the economy would be in a much worse place today and the cost to taxpayers even greater. But it has cost us big time, as the nation's budget deficit and debt load are out of control.

Unfortunately, President Obama's recently released 10-year budget plan doesn't engender much confidence that our fiscal problems will be resolved anytime soon. Obama has put forth a budget that isn't sustainable even on paper. Even with a freeze on discretionary government spending - the President's principal response to the fiscal outlook - projected deficits are too large to stem an unmanageable rise in the nation's debt.

It's easy to be pessimistic about the prospects for getting our fiscal act together in a reasonably graceful way, but - even after delivering what might seem like a grim diagnosis of this budget - I'm optimistic. Why? While our fiscal problems may appear overwhelming, they actually aren't. The economy is gaining traction and the deficits will narrow as the fiscal stimulus fades and tax revenues rise. Even if this President and Congress didn't do much of anything, the deficit would be nearly halved between this year and early on in the next President's term (whether that be Obama or his Republican challenger).

Of course, this is far from good enough. Even when the economy is in full swing, the deficit will still be unsustainably large. Interest payments on the debt will continue to mount, and unless policymakers make some hard choices on government spending and tax policy, the cost will ultimately swamp us.

The good news is that an intellectual consensus is forming between the rational right and the rational left of the political spectrum on what choices to make. Two bipartisan fiscal commissions recently came to the same conclusion that both government spending cuts and tax increases are necessary to address our fiscal problems, and that most of the onus should be on reducing spending. Based on historical experience with fiscal austerity here and overseas, economies of countries that tackle their budget problems primarily through spending cuts perform better in the long run.

In addition to freezing discretionary spending, the focus should be on putting Social Security on solid financial ground, forever. This can be accomplished by indexing the retirement age to longevity, reducing benefits for very high income households and increasing future benefits on a more accurate measure of inflation. These changes should not apply to those nearing retirement - they have done their financial planning based on the current system - but to younger workers who have decades to make the necessary adjustments to their saving.

As far as taxes are concerned, the focus should be on reducing exclusions, exemptions, deductions and credits that riddle the tax code and cost the federal government more than $1 trillion each year. The mortgage interest deduction is one of the largest and most popular, but there are hundreds more, indirectly funding student expenses, health insurance, childcare costs, local property taxes and on and on. Limiting tax expenditures can raise so much revenue that policymakers could even lower marginal tax rates for individuals and corporations, making such a change more politically palatable.

While all of this is doable, it won't be easy, and policymakers will almost surely need a push from global investors. With interest rates remaining very low, investors who are buying our debt have been incredibly patient with us. However, this is largely because in these tough times, they don't know where else to put their money. Europe's and Japan's fiscal problems are worse than ours - the European debt fiasco is the most recent case in point - and emerging economies are too small to absorb all that global cash seeking a home. But this won't last; in fact, it may take a period of much higher interest rates to convince the American electorate (and thus policymakers) that there is no alternative to solving the nation's fiscal problems.

Even then, to get all of this done will take political courage. Whoever is in charge after the next election will need to take a potentially career-ending political risk and show a clear willingness to both raise taxes on the middle class and impose cuts on the future growth of Social Security. Supporters will rebel, as did supporters of the first President Bush when he backtracked on his "read my lips" no-tax pledge. Bush didn't get a second term, but this brave move was the political catalyst that ultimately produced a federal budget surplus a decade later.

No leader can really change anything without being willing to give up everything. Our nation has overcome many daunting challenges, mostly because we had leaders who put the nation's future ahead of their own. It is time for our leaders to do the same, and I'm optimistic that they will.

What's Wrong With the Budget

Tue, 15 Feb 2011 08:54 GMT

Gus Faucher explains both the politics and the accounting in Obama's 2012 budget, here on Dismal Scientist, and here on NPR's Takeaway.

A Word from the White House

Mon, 14 Feb 2011 15:19 GMT

With the new Obama budget released today, the director of OMB offers this handy capsule version.

Reforming Fan & Fred

Fri, 11 Feb 2011 10:28 GMT

Mark Zandi discusses mortgage finance reform with CNBC.

What to Do with Fannie & Freddie

Tue, 8 Feb 2011 08:16 GMT

From WSJ.com:

Moody's Zandi: Replace Fannie, Freddie With Public-Private Hybrid

Mortgage rates could be one percentage point higher and house prices 10% lower if the U.S. mortgage market were fully privatized, according to a paper to be released Tuesday by Mark Zandi, chief economist at Moody's Analytics.

The calculations help build Mr. Zandi's case for replacing Fannie Mae and Freddie Mac with new entities constituting a public-private hybrid system for financing home loans.

The proposal is the latest in a growing list of white papers by economists and academics looking to influence the debate over how to reinvent the nation's mortgage market. The Obama administration is set to issue its own recommendations as soon as this week.

Read the whole thing

UPDATE: The Obama Administration has released its own plan for reforming Fannie & Freddie.

January Jobs: A Weather Story?

Mon, 7 Feb 2011 10:33 GMT

Catching up on the January jobs debate:

Four Reasons to Worry

Tue, 1 Feb 2011 15:39 GMT

Mark Zandi gives NPR's Planet Money four reasons to worry about the economy:

Housing
Europe
China
State and local governments

From Here to the Nile

Tue, 1 Feb 2011 07:55 GMT

The Nightly Business Report asks Mark Zandi about U.S. housing and the impact of unrest in Egypt. (Segment starts about 4:20.)

Watch the full episode. See more Nightly Business Report.

Prepping for State

Mon, 24 Jan 2011 10:32 GMT

ABC News gets a quick economic briefing to prepare for the President's big speech.

Fixing Fannie and Freddie

Mon, 24 Jan 2011 08:51 GMT

The following appeared in The Philadelphia Inquirer, Jan. 23, 2011:

Healing the Mortgage Ills

By Mark Zandi

Washington is gearing up for its next epic policy debate: what to do about Fannie Mae and Freddie Mac.

Fannie and Freddie are the two mortgage behemoths that the federal government created decades ago, and then took over as the financial system unraveled in 2008. What policymakers decide will determine how high mortgage rates go in the future, how easy it will be to obtain a home loan, and whether the popular 30-year fixed-rate mortgage continues to exist.

No one wants to return to the situation that existed just before the financial crisis. Fannie and Freddie had evolved into odd combinations of public and private: profit-maximizing, shareholder-owned companies with unique charters and implicit - but never clearly spelled out - federal backing. Each could thus borrow more cheaply than other financial institutions could, and both used that advantage to earn rich profits investing in higher-yielding mortgages. Fannie and Freddie were also allowed to operate with very thin capital cushions to protect them if their investments went bad.

There was a political quid pro quo for these advantages: Fannie and Freddie had to give a significant share of their mortgage loans to lower-income homeowners and members of disadvantaged groups. It wasn't a bad goal, although it was probably taken too far, and the nation clearly paid a high price for it. Of all the federal government's bailouts during the financial panic, those of Fannie and Freddie will cost taxpayers the most - almost $150 billion. Rescuing Detroit's automakers cost about $15 billion, while the bank bailouts resulted in a net gain for taxpayers.

One solution to the Fannie and Freddie problem is to formally and permanently make them part of the federal government. The chief benefit: a guaranteed steady flow of credit, at reasonable rates, in good and bad economic times.

But nationalizing Fannie and Freddie would saddle the government with significant new risks, as well as with the institutions' debts, which would add to an already-mountainous federal debt load. In the long run, such a system could also stifle innovation, while tempting lawmakers to subsidize mortgages for favored constituents, distorting a huge part of the U.S. economy.

Another solution is the opposite approach: full privatization. Allow no government backstop for the mortgage market, implicit or explicit. Government might retain a small role, but Fannie and Freddie would be spun out to the private market.

A privatized system would give all parties more incentive to be prudent. Mortgage originators, issuers of mortgage-backed securities, rating agencies, and investors would all suffer if they made bad decisions. Nobody would be too big to fail, and taxpayers would be off the hook - at least in theory.

But full privatization probably works better in theory than it would in practice. Whatever legislators pledged never to do, global investors assume the U.S. government would rescue the housing market in a crisis. Meanwhile, a privatized mortgage-finance system would significantly raise costs for borrowers, and it would be a much less reliable source of credit.

Privatization would also endanger the 30-year fixed-rate mortgage, a bedrock of home lending since the Great Depression. Such loans are practically unique to America; nearly everywhere else, homeowners can obtain only adjustable-rate mortgages, with monthly payments fixed for specified short periods. But because they are risky for banks and difficult to manage, long-term fixed-rate mortgages will almost certainly disappear without some federal support.

Fortunately, there is a middle way between nationalization and privatization. A hybrid mortgage-finance system would allow private institutions and the federal government to share the risks. It holds the most promise for consistent, affordable mortgage loans on prudent terms for borrowers, with minimal costs to taxpayers.

In a hybrid system, some of Fannie's and Freddie's operations would be turned over to the private market, while others would be transferred to the government. Instead of the market-distorting implicit government support for Fannie and Freddie, the government would offer insurance at an explicit price. The hidden cost of Fannie's and Freddie's subsidies to homeowners would also be made visible on the government's books. Private institutions would provide the bulk of the system's capital and would originate and own the mortgages. The government would insure the system against catastrophe, regulate it, and spell out whatever subsidies are given to low-income families or others.

A hybrid system would preserve the key benefits of nationalization and full privatization. Investors would remain on the hook for most losses, keeping incentives in place for prudent lending and risk pricing. The government's involvement, however, would keep mortgage rates lower and help mortgage credit flow freely.

Decisions made in coming months about the future of Fannie and Freddie will affect homeowners and the economy for decades. Success will depend on striking the appropriate balance between the benefits of the private market and the backstop of the federal government. Finding the right balance will result in a stronger housing market, a more stable financial system, and a healthier economy.

China in the House

Wed, 19 Jan 2011 17:23 GMT

Mark Zandi talks with Bloomberg about global imbalances, U.S. housing and more.

Picture Europe

Thu, 13 Jan 2011 11:18 GMT

The graphic wizards at The Economist have boiled down Europe's current situation to a handy set of maps and charts. A nice complement to Dismal Scientist's global map on the Sovereign Risk Tracker page.

The Employment Issue

Fri, 7 Jan 2011 08:15 GMT

Latin American Predictions

Wed, 5 Jan 2011 15:57 GMT

Alfredo Coutino talks with CNN's Latin America desk about the outlook for that region in 2011.

Employment Looking Up, Maybe

Wed, 5 Jan 2011 15:35 GMT

The latest employment numbers look promising. Mark Zandi discusses the outlook with Bloomberg TV:

An Optimist's Guide to the Long Term

Tue, 4 Jan 2011 15:56 GMT

Mark Zandi helps Yahoo TechTicker reach consensus on the long-term outlook.

More of Mark on Yahoo here.

The Year Ahead for Housing

Wed, 22 Dec 2010 09:58 GMT

Mark Zandi talks housing with blogger and real-estate appraiser Jonathan Miller.

Speaking to the Heartland

Fri, 17 Dec 2010 17:07 GMT

Concern about Europe's debt problems stretches as far away as Minnesota. Our colleague Jeet Dutta chats with radio station KDLM in Detroit Lakes.

Download MP3

Forecast Assumptions

Mon, 13 Dec 2010 17:46 GMT

Monetary policy. Monetary policy is expected to remain highly stimulative throughout 2011. The Federal Reserve’s current zero interest rate policy will stay in place into 2012, and the Fed will complete its scheduled purchases of $600 billion in Treasury securities by June, as scheduled. This is in addition to the $300 billion in purchases needed to offset those securities that will run off the central bank’s balance sheet during this period. A stubborn, nearly double-digit unemployment rate and core inflation that is firmly below 1% are behind policymakers’ aggressive stance.

However, additional quantitative easing will be unnecessary, as the unemployment rate will be moving definitively lower by this summer and core inflation will stabilize. This will be a relief to policymakers, given the withering criticism they have received from global central banks over currency concerns, fixed-income investors fearful of accelerating inflation, and congressional Republicans who say that the Fed is overstepping its mandate.

While these criticisms are largely overdone, QE does complicate the Fed’s eventual exit from its highly stimulative monetary policy. The size of the Fed’s balance sheet is expected to peak in mid-2011 at over $2.5 trillion; the Fed has just over $2 trillion on its books, up from $800 billion prior to the start of the financial panic in 2007. It will be difficult to reduce this hefty balance sheet without fueling uncomfortably high inflation at some point.

Despite the economy’s better prospects this year, the Fed is not expected to raise short-term rates until the spring of 2012. The interest rate on reserves is expected to end 2012 at 2% and will not normalize, to just over 4%, until late 2013.

Fiscal policy. There will be little progress in reducing the budget deficit in the current fiscal year; it will come in near $1.3 trillion in fiscal 2011, or 9% of GDP. This is about the same as in fiscal 2010 and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

Adding to this year’s deficit is the deal reached in late 2010 between the Obama administration and Republican congressional leaders. The major provisions include the extension of current personal income tax rates for two more years, the extension of the emergency unemployment insurance program through the end of 2011, a sizable Social Security payroll tax cut, and the expensing of any business investment. The size of the deal was a surprise, and while fiscal policy will still not add to economic growth this year on net, at least it will not be much of a weight. The deal helps ensure that the recovery will evolve into an economic expansion.

A much better economy and fading of fiscal stimulus measures will result in a much smaller budget deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near the “structural” budget deficit—consistent with an economy operating near its potential—of close to 5% of GDP. However, that is still well above the sustainable long-term budget deficit of about 3% of GDP. Given the current divided government, the forecast assumes that meaningful deficit reduction will not take place until at least 2013.

U.S. dollar. The U.S. dollar has firmed in recent months as the prospects for more Federal Reserve quantitative easing have faded and the European debt crisis has revived. The dollar is up most against the euro. In the near term, the dollar is expected to gain further against the euro and, to a lesser extent, the pound. The U.S. recovery is expected to gain traction, and the European economy will backtrack as fallout from the European debt crisis, including financial and fiscal restraint, takes full hold. The European Central Bank and Bank of England will not begin normalizing their monetary policies until well into 2012. Longer run, the dollar is roughly appropriately valued against the euro and somewhat overvalued against the pound.

The dollar is expected to depreciate against the yuan by some 5% annually over the next five or six years. U.S. policymakers would like this to occur much more quickly given the very wide trade deficit with China, but the Chinese are unlikely to accommodate this given the problems it would pose for their export-oriented manufacturers.

On a broad trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns over a rapid broad-based weakening in the dollar are overdone.

Energy prices. Oil prices have moved higher in recent weeks, with the price of a barrel of West Texas Intermediate crude recently trading near $90. Political turmoil in Egypt has had only a small impact on prices, with the problems there not expected to spill over into the key energy-producing regions of the Middle East.

Over the past two years, the price has ranged from $40 at the start of 2009, during the depths of the recession, to a record of almost $150 in the summer of 2008. Natural gas prices remain low, particularly compared with oil prices, at under $5 per million BTUs.

Oil prices are expected to remain close to the current $90 per barrel through much of 2011 and range as high as $100 in the next several years. This would be consistent with global demand and supply fundamentals, abstracting from the business cycle. Prospects for even higher oil prices are low given significant global excess productive capacity, particularly in Saudi Arabia. Lower prices would occur only if the global expansion falters.

Natural gas prices will have trouble keeping up with oil prices during the next several years, given a very substantial glut of natural gas. Demand weakened with the recession, and supply has increased substantially in response to previously very high prices. Natural gas prices are expected to average $5 per million BTUs in 2011 and closer to $8.50 over the longer term.

The 2012 Problem

Fri, 10 Dec 2010 09:38 GMT

David Leonhardt gets Mark's take on the consequences of the tax and benefits compromise for growth in 2012:

I asked Mark Zandi of Moody’s Analytics about the 2012 problem — the fact that the tax-cut deal between President Obama and Congressional Republicans would likely reduce economic growth in 2012, as Paul Krugman and others have pointed out.

Mr. Zandi agreed. “In my previous baseline I expected real GDP growth of 2.8 percent in 2011 and 4.2 percent in 2012,” he wrote in an e-mail. “I’m now expecting real GDP growth of 3.9 percent in 2011 and 3.4 percent in 2012.”

Yet Mr. Zandi still favors the package. He explained:

There are four key reasons why slower 2012 growth with the package should not forestall its passage.

First, stronger growth in 2011 (particularly in the first half of 2011) will ensure that the recovery achieves escape velocity. That is, enough GDP growth to generate enough job growth to bring down unemployment and propel the recovery into a self-sustaining expansion. This is a necessary condition for addressing our long-term fiscal problems. Without this additional boost, unemployment would continue to hover near 10 percent throughout 2011 and the recovery would remain very vulnerable to anything that might go wrong. The objective of the Recovery Act was to end the Great Recession and jump-start a recovery. It succeeded. The objective of this package is to ensure the recovery evolves into a self-reinforcing expansion. I’m confident it will do that.

Second, getting unemployed workers back to work more quickly will reduce structural unemployment; the longer people stay out of work the greater the odds they will not get back into the work force as their skills and marketability erode.

Third, it eliminates the need for more quantitative easing; QE is a plus for the economy but a small one and it complicates things enormously with the Fed in their relationship with other central banks and the Republican Congress.

Fourth, despite slower growth in 2012 with the package, real GDP and employment are higher and unemployment lower by year-end 2012 than in the previous baseline.

Hosannas and Hoots

Fri, 10 Dec 2010 08:33 GMT

No comment on this, aside from some curiosity about what David Stockman eats for breakfast.

Trans-Atlantic Outlook

Thu, 9 Dec 2010 10:35 GMT

Mark Zandi talks with Bloomberg News about the Fed and the outlook for the U.S. in 2011.

Washington Calling

Thu, 9 Dec 2010 08:52 GMT

Washington Post policy-wonk Ezra Klein blogs on the new tax/stimulus deal:

I called Moody's chief economist Mark Zandi this morning to see what he thought of the tax cut deal. When it comes to stimulus, Zandi's figures are probably the most influential in the country, and I've cited them several times before on this blog. So what does he think? Well, he likes it. He really, really likes it...

Update: NYTimes econ-pundit Paul Krugman weighs in on language.

Stealth Stimulus?

Thu, 9 Dec 2010 08:43 GMT

The debate on the tax deal shifts from fairness and deficits to whether it will be effective stimulus. Gus Faucher talks with NPR's Marketplace.

Sad Surprise on U.S. Jobs

Fri, 3 Dec 2010 11:14 GMT

November's job numbers were a major disappointment. Mark Zandi discusses with the CNBC crew.

And Gus Faucher explains the numbers to NPR's Marketplace.

A Strategy on Taxes

Wed, 1 Dec 2010 10:24 GMT

Mark Zandi talks with Fox Business News about the tax debate.

Taming the Fiscal Monster

Sun, 28 Nov 2010 17:57 GMT

The following appeared in The Philadelphia Inquirer on Sunday, Nov. 27:

Our fiscal challenges are big, but manageable

By Mark Zandi

Of all our nation's economic worries, none are scarier than the federal government's record budget deficits and mounting debt load. Unless we find a way to make big changes to Social Security, Medicare, and other government programs, and also fix our tax code, the economy will break. The vitriol of the midterm elections and the seemingly broken political process only add to the anxiety.

It may seem odd given all this, but I'm optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn't good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult - for context we spend more than $100 billion a year in Iraq and Afghanistan - but it is doable.

Particularly encouraging is the intellectual consensus now forming. You can see it happening around recent proposals from two different bipartisan commissions formed to tackle long-term federal budget issues. While the proposals will not become law, they lay down important benchmarks and establish the basis for a healthy and ultimately successful debate.

The key point of agreement is that government spending cuts and tax increases are necessary to repair our budget hole. Perhaps more important, both commissions agree that the focus should be on spending restraint. An examination of other periods of fiscal austerity here and abroad suggests that adjusting spending is better for an economy than raising taxes. Where to balance spending restraint with tax increases will be the focus of political battles to come, but judging by the commissions' proposals, an achievable middle ground exists.

The proposals put so-called tax expenditures in the crosshairs. The exclusions, exemptions, deductions, and credits that riddle the tax code cost the government more than $1 trillion each year. The mortgage-interest deduction alone costs more than $100 billion annually. But hundreds of other special provisions fund student expenses, health insurance, child care, local property taxes, and on and on.

These tax expenditures are more properly thought of as government spending than tax cuts. A deduction for local property taxes, for example, is no different from the federal government's sending checks to homeowners. Cutting tax expenditures is thus cutting government spending. Indeed, removing tax breaks for specific purposes is analogous to eliminating congressional earmarks.

Most tax expenditures are also inefficient and regressive. The mortgage-interest deduction doesn't improve housing affordability, its ostensible goal. Any tax benefit is simply "capitalized" into house prices, which rise as the deduction fuels demand. The benefits flow to owners of bigger homes with larger mortgages and higher incomes, who can itemize and thus claim the deduction.

On direct government spending, a growing consensus favors moving Social Security from an entitlement to an insurance policy. People would receive benefits as they are needed. Higher-income earners would pay more in payroll taxes to fund the program and receive less in benefits. There is still debate over whether the retirement age should rise, although given Americans' increasing longevity, a slow increase seems logical.

Government spending on health care would be subject to an explicit budget. As they are currently structured, the large and rapidly growing Medicare and Medicaid programs are uncapped; there is no real mechanism to hold spending to affordable levels. The result, unsurprisingly, is runaway health-care spending. While specific proposals to rein in health-care spending remain elusive, even with the new law in place, the idea is that strict budget caps will force changes that ultimately make government-provided health care more efficient.

No one is arguing that all tax expenditures should be eliminated today, or that every needed spending cut can occur next year. As long as we lay out a credible path soon, we can implement the changes over the next decade. The United States isn't Greece or Ireland, nations that have no choice other than an immediate change in direction; or even France or Germany, where problems must be addressed within the next several years.

Global investors still have faith in America; this is clear from our still very low interest rates, and the fact that investors still run for safety in U.S. Treasury bonds when there is trouble anywhere in the world - even here. Of course this faith can be stretched only so far; if we don't find the political will to map out this credible path soon, our fiscal morass will only deepen and our economy will be significantly diminished. But we are up to the task. I'm optimistic, but it is time to execute.

Why the Fed Must Be Independent

Wed, 24 Nov 2010 13:26 GMT

Mark talks with CNBC producer Lori Ann LaRocco:

Zandi: In Defense of Fed Independence

The Fed has been politicized like never before. Now some Capitol Hill lawmakers are arguing that its dual mandate—price stability and full employment—should be stripped. I decided to speak with Mark Zandi, chief economist of Moody's Analytics about all of this and what's his message to Congress.

MZ: I think the worst thing that could happen is if the Fed was politicized. An apolitical Federal Reserve is a cornerstone of our financial system and broader economy. So nothing is more important than maintaining the Fed's independence. And the fact that its wrapped in the political process is just disturbing and disconcerting.

LL: Was QE2 necessary?

MZ: From the Fed's perspective part they view this as a part of monetary policy. So when you an economy that is struggling, an unemployment rate that is near double digits, and inflation that is low and decelerating it calls for more monetary stimulus and this is the next step.

I think they were probably surprised by the response and the fact it got wrapped up in the political debate . In hind site, they might have done things a bit differently. Maybe they would have waited until the next the next FOMC meeting which would have been on the other side of the election, and with the emphasis that the right thing for the economy is more QE.

LL: Do you think the Fed should continue to have the dual mandate?

MZ: I think reducing the dual mandate to a single mandate, would not result in a significant change in the way they conduct policy. I do think though, it may send an unfortunate signal to the broader population that the Fed's only purpose going forward would be on inflation and not on their plight in finding a job. So timing, I think particularly, would be unfortunate because people might believe the Fed is not focused on what they care about the most and that's finding a job.

So, given that the change in mandate doesn't mean a whole lot, symbolically, it means something and I don't think it makes sense to make the the change. Certainly not at this juncture when things are in such flux and the economy is still struggling to get going. This is perhaps a debate for another day when the economy is functioning more normally.

LL: What are your thoughts on Ron Paul who will be overseeing the Fed when he chairs the House Subcommittee for Domestic Monetary Policy and Technology and wants to revolutionize the monetary policy. Ending the Fed or at least auditing it. Is an audit in order?

MZ: I think an audit of the Fed should be very well defined and narrowly focused and should be designed not to effectively, or seemingly affect the monetary policy process because that would be very counter productive.

Audits are not a bad thing per say, but they have to be well defined and focused. Its the independence of the Fed that is the bedrock of the financial system and the economy.

LL: Do you think the Fed is being unfairly targeted by the GOP?

MZ: What Bernanke is doing is what Bernanke thinks is what is needed and is appropriate. What they are doing is a function of the tough economy and prospects for out right deflation. So I think what they are doing has nothing to do with politics.

This is what they think is best, so therefore, it would be prudent for Congressmen, policymakers, Administration and whomever else, allow the Fed to do their job and not interfere with them because that has always worked well for us. We have a lot of problems to addressed.

LL: Would you have an criticisms on how the Fed has handled this?

MZ: The only criticism I would have on the Fed is probably the marketing of all of this. I think they needed to be clearer up front with how they expected QE2 to benefit the economy, what the downsides were and if people had that framework then maybe, some of this might not have happened. But in terms of what they have done, I think its entirely appropriate. And its entirely inappropriate for other policy makers to interfere in the process in anyway particularly at this point.

Forecast Assumptions

Tue, 16 Nov 2010 14:47 GMT

Forecast Assumptions

BY MARK ZANDI

Monetary policy The Federal Reserve announced the resumption of quantitative easing at the early November FOMC meeting. Policymakers committed to purchasing $600 billion in Treasury securities by June 2011, in addition to the $300 billion needed to offset those securities on the Fed’s balance sheet that will run off during this period.Financial markets had already largely discounted the move, pushing down 10-year Treasury yields to 2.5% and fixed mortgage rates to a near-record low of 4.25%, fueling a 10% gain in stock prices. Inflation expectations have also firmed.Motivating the Federal Reserve to restart QE is the weaker recovery; annualized real GDP growth is about 2%, below the economy’s potential. Employment growth is thus weak, and the unemployment rate seems likely to return to the double-digits in coming months. Inflation is also very low—less than 1% based on the core CPI—and still decelerating. Given the considerable risk of outright deflation if the economy were to backtrack into recession, prudent risk management argues for more monetary easing. A bit more QE is likely during the second half of 2011.The economy will not be strong enough for the Fed to begin tightening monetary policy until the spring of 2012. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, will be the key target rate until the Fed has successfully drained the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 2% and will not normalize to just over 4% until early 2014.

Fiscal policy The federal government's fiscal problems remain enormous but are slowly improving. The budget deficit came in just below $1.3 trillion in fiscal 2010, down from a record $1.4 trillion in fiscal 2009, or 10% of GDP. The deficit is expected to narrow further this year to nearly $1 trillion and again in fiscal 2012 to $850 billion, 5% of GDP.The unprecedented recent deficits reflect both the Great Recession and the costs of the government’s response. The total direct costs, including the fiscal stimulus and efforts to repair the financial system, are expected to reach almost $1.5 trillion. Adding in nearly $750 billion in lost revenue from the weaker economy, the total budgetary cost of the crisis is $2.25 trillion, over 15% of GDP.The most important near-term fiscal policy decision is what to do about the soon-to-expire individual income tax cuts passed under President Bush. The Obama administration has proposed allowing the tax cuts to remain in place for joint filers with incomes of less than $250,000 and allowing the cuts to expire in 2011 for those making above that. Given the fragile recovery and Republican opposition to allowing any of the cuts to expire, it is assumed that the tax cuts will be extended for everyone in 2011, with higher rates for higher-income taxpayers phased in beginning in 2012.Given the divided government in the wake of the midterm elections, it is assumed that there will be no other near-term significant fiscal stimulus efforts. Dealing with the nation’s daunting long-term fiscal challenges will wait until after the 2012 elections.

U.S. dollar Tensions have mounted in global foreign exchange markets as the Federal Reserve’s resumption of quantitative easing has resulted in a weaker U.S. dollar against most other currencies. The broad trade-weighted dollar has fallen more than 5% since markets began assuming QE this past summer.The dollar’s decline has been most pronounced vis-à-vis the euro, yen, and emerging economy currencies. While this is a plus for U.S. trade and growth, it is a hardship to these other economies. Greatly adding to this hardship is that the Chinese yuan and a number of other Asian currencies, given their peg to the dollar, have also fallen against these currencies. Global criticism of the Federal Reserve’s QE policy has thus intensified, as has the ire over the Chinese currency peg.The yuan appears to be undervalued by as much as 30% and is expected to strengthen gradually against the dollar over the next five to six years. With the dollar’s slide nearly over, it is assumed that global policymakers are able to keep a lid on protectionist pressures. Indeed, the dollar is expected to gain traction against the euro and pound by early next year.Longer run, the broad trade-weighted dollar is not expected to move substantially. It will decline against the yuan and other emerging economy currencies but rise against the yen, euro and pound.

Energy prices Oil prices have moved higher in recent weeks with the weakening dollar; the price of a barrel of West Texas Intermediate crude is close to $90. Over the past two years, oil prices have ranged from $40 during the depths of the recession to a record of almost $150 in the summer of 2008. Natural gas prices remain low, particularly compared with oil, at under $4 per million BTUs.The price of a barrel of oil is expected to remain close to $85 into 2011 and range as high as $100 over the next several years. This would be consistent with trend global supply and demand, abstracting from the vagaries of the business cycle.Prospects for even higher oil prices are low given significant global excess productive capacity to produce oil, particularly in Saudi Arabia. This supply would likely be brought on line if oil prices were to rise too high, too fast. Prices would move lower only if the global economic expansion falters.Natural gas prices will have trouble keeping up with oil over the next several years as a very substantial glut of gas has developed. Natural gas prices are expected to average $4.50 per million BTUs in 2010 and closer to $8.50 over the longer term.

For Econometricians Only

Fri, 12 Nov 2010 16:03 GMT

Speaking of notable staff achievements, Senior Economist Brian Poi's book, Maximum Likelihood Estimation with Stata, 4th ed. has just been published and will appeal to economists with a taste for seriously quantitative analysis. Stata is the leading statistical analysis package used by academic economists as well as researchers in government, non-profits, and private industry.

This book is for people who do cutting-edge analysis and want to apply the latest statistical methods to their data, before those methods are even available as canned solutions in other software packages. You can read more about the book here.

Poi joined Moody's Analytics' West Chester office in September after spending the past eight years as a senior developer at StataCorp.

What the Top Forecasters Say

Wed, 10 Nov 2010 10:15 GMT

Not that we're averse to tooting our own horn. But how much better to outsource the horn-tooting to an independent third party—in this case Marketwatch, which has awarded our Dismal Scientist forecasting team of Aaron Smith and Ryan Sweet the title Forecasters of the Month for October. Why? Read on:

Economy stabilizing, top forecasters say

Sweet, Smith of Moody’s Analytics say it’s still lackluster growth

WASHINGTON (MarketWatch) — Top forecasters are breathing just a little easier now that the economy is showing signs of stabilizing, following a few months of iffy growth.

Recent data show the economy has improved, but “the pace of growth is still fairly lackluster,” said Aaron Smith, a senior economist for Moody’s Analytics, who, along with his colleague Ryan Sweet, won the October Forecaster of the Month contest. It’s the third award for the team from Moody’s, which was formerly known as Economy.com...

Smith and Sweet say their forecasts for the high-frequency data are the result of true teamwork. Smith tends to be more optimistic, while Sweet is the more cautious one. They also take advantage of the company’s large group of economists, led by founder Mark Zandi.

“We bounce our forecasts off” the other economists, Sweet said. It helps to have access to specialists in regional economies or in individual sectors of the economy, such as housing, labor markets, or retail.

To win the October contest over 44 other forecasters, Smith and Sweet came from behind with the contest’s most accurate forecasts on the last two indicators of the month: new-home sales and durable-goods orders. They also had among the most accurate forecasts on the ISM index, the consumer price index and the consumer confidence index.

The Case for Optimism

Tue, 9 Nov 2010 15:09 GMT

Mark Zandi laid out the case for a strengthening recovery in the U.S. at last week's Fall Outlook Conference. Dismal Scientist subscribers can listen to highlights of his talk here. Everyone can read a synopsis of his argument, as presented to the 18th Annual State Fiscal Policy Conference in Washington, DC and transcribed by the NC Policy Watch blog, here:

Reason #1: The Federal Reserve’s fiscal policy actions. Zandi thinks “they get it,” and are going to be aggressive in preserving the recovery. While there is still a chance of a double-dip recession, Zandi says it’s one in three or less.

Reason #2: Businesses, especially big and medium-sized businesses, are “very profitable” now. Current business profit growth is 40 percent this year. “That’s about as good as it gets,” Zandi says. As profits surge, jobs should follow. For now, we’re seeing layoffs stop, but hiring should pick up within nine months or so, Zandi says. Credit constraints on small business could limit this, he cautioned, which is why it’s important to offer assistance to small businesses.

Reason #3: We’re righting the wrongs that got us into this mess, including financial reform to fix bad loans, says Zandi. Lack of oversight allowed big banks to perform casino-style gambling with our economy... Also, household debt has fallen by $1 trillion since peaking two years ago. To give you perspective, that’s 6-7 percent of total household liabilities. People are getting out of debt, which means they will be able to both spend more and save more.

Reason #4: housing inventories have peaked. This is a bit more complex than the others, but the upshot is that our housing crisis may finally have hit bottom.

Reason #5: The recovering economy means state tax revenues will revive in 2011. This will ease the budget stresses [in state capitols]. Nationally, the revenue growth forecast is 4.8 percent.

Fixated on Jobs

Fri, 5 Nov 2010 09:00 GMT

All eyes on the U.S. employment report for October.

Of Taxes and Gridlock

Thu, 4 Nov 2010 08:43 GMT

After the midterm elections, is Washington capable of economic policymaking? Mark Zandi discusses with Bloomberg News.

The Big Picture on Housing

Wed, 3 Nov 2010 15:35 GMT

NPR's Planet Money asks where the housing market is headed.

Election Aftermath

Wed, 3 Nov 2010 11:36 GMT

NPR's Marketplace asks Mark Zandi how the midterm results might affect economic policymaking.

audio here

October Forecast Assumptions

Wed, 3 Nov 2010 09:26 GMT

Monetary policy

The Federal Reserve is expected to resume quantitative easing—in which the Fed creates money electronically and uses the proceeds to expand its holdings of Treasury securities in an effort to reduce long-term interest rates—by year’s end. Policymakers are expected to initially make a commitment to purchase $300 billion in securities, but they will ultimately buy $1 trillion by next summer. Financial markets have already largely discounted this move, a key reason why 10-year Treasury yields have fallen to near 2.5%, the dollar has weakened, and the stock market has rallied.

The economy will not be strong enough for the Fed to resume tightening monetary policy by raising short-term interest rate until early 2012. Before raising rates, policymakers will need to be sure that the unemployment rate is definitively moving lower and that inflation is reaccelerating. When policymakers do begin raising rates, the interest rate on reserves and not the federal funds rate is likely to become the key target, at least until the Fed successfully drains the large amount of excess reserves it has supplied to the banking system during the financial crisis and recession. The interest rate on reserves is expected to end 2012 at 2.5% and will not normalize to 4% until mid-2013.

Fiscal policy

The federal government's fiscal problems remain enormous. The budget deficit ballooned to near $1.4 trillion in fiscal 2009, up from $475 billion in fiscal 2008. This year's deficit is expected to be closer to $1.3 trillion, and the cumulative deficit over fiscal 2009-2012 will be nearly $5 trillion.

These unprecedented deficits reflect both the Great Recession and the costs of the government’s multifaceted response to it. Total direct costs, including the TARP, the fiscal stimulus, and other efforts, are expected to reach almost $1.6 trillion. Of this, just over $1 trillion is the cost of fiscal stimulus efforts. Adding in nearly $750 billion in lost revenue from the weaker economy, the total budgetary cost of the crisis is projected to top $2.35 trillion, about 16% of GDP. For historical comparison, the savings and loan crisis of the early 1990s cost some $350 billion in today's dollars: $275 billion in direct costs plus $75 billion due to the associated recession, equal to almost 6% of GDP at that time.

The most important near-term fiscal policy decision is what to do about the expiring individual income tax cuts. The Obama administration has proposed allowing the tax cuts to remain in place for joint filers with annual incomes of less than $250,000 and allowing the cuts to expire in 2011 for those making more than that. Given the fragile recovery, it is assumed that the higher tax rates for upper-income taxpayers will be phased in beginning in 2012.

The longer-term budget remains very disconcerting as the costs of the Medicare, Medicaid and Social Security programs balloon. President Obama's budget proposals have not significantly addressed the nation's long-term fiscal problems, with the U.S. federal debt-to-GDP ratio rising to over 80% a decade from now under the president's plan. This is double the approximately 40% ratio that prevailed before the financial crisis. This long-term budget outlook thus remains untenable and will ultimately force various substantial changes to entitlement programs and tax policy, which are assumed to occur in the longer-term outlook.

U.S. dollar

The weaker U.S. recovery and Europe’s ability to shrug off any serious economic fallout from its sovereign debt crisis, at least to date, has weighed on the U.S. dollar vis-à-vis the euro and British pound in recent weeks. The euro had been trading as low as $1.2 in the teeth of Europe’s debt crisis earlier this summer, but is now closer to $1.4. The pound has also strengthened, trading as high as $1.6.

The dollar is expected to gain traction against the euro and pound early next year. The U.S. recovery will remain intact and the European economy is expected to backtrack as fallout from the recent crisis, including financial and fiscal restraint, take hold. The European Central Bank and Bank of England are thus not expected to begin normalizing their monetary policies until well into 2012. Indeed, the ECB is still buying sovereign debt to help put an end to the crisis.

Longer run, the broad trade-weighted dollar is expected to drift lower, particularly against the yuan as China ramps up its revaluation process. The dollar is an estimated 25% overvalued against the yuan, and while the Chinese will be slow to revalue, the economic logic for doing so is increasingly compelling. There is no more efficient way for China to address its own inflation and speculation concerns than allowing its currency to appreciate.

Energy prices

Oil prices, as measured by a barrel of West Texas Intermediate crude, have been recently trading below $80. Over the past two years, prices have ranged from well below $50 at the start of 2009 during the depths of the recession to a record of almost $150 in the summer 2008. Retail gasoline prices have declined to $2.7 per gallon, compared with an all-time high of close to $4. Natural gas prices remain low, particularly compared with oil prices, at around $4 per million BTU.

Oil prices are expected to remain close to their current $80 per barrel through the remainder of the year, and to range as high as $100 over the next several years. This would be consistent with trend global supply and demand, abstracting from the vagaries of the world business cycle.

Prospects for even higher oil prices are low, given current significant global excess productive capacity to produce oil, particularly in Saudi Arabia. Producers would likely bring this online if oil prices were to rise too high, too fast. Lower prices would occur only if the global economic expansion falters.

Natural gas prices will have trouble keeping up with oil prices during the next several years, as a very substantial glut has developed. Natural gas prices are expected to average $5 in 2010 and closer to $9 over the longer term.

All Economics Is Local

Thu, 28 Oct 2010 09:40 GMT

Macroeconomics guru Gus Faucher was in DC this week, coaching reporters and bloggers from around the U.S. about covering the recovery at the local level. His talk went unrecorded, but the slides are pretty educational all by themselves:

Tracking the Economic Recovery in Your Town by Gus Faucher of Moody's Economy.com

View more presentations from Reynolds Center for Business Journalism.

Foreclosure Fallout

Mon, 25 Oct 2010 09:36 GMT

How distressed should we be about the mess in processing defaults? Mark Zandi discusses with CNBC:

When Numbers Get Serious

Wed, 20 Oct 2010 14:49 GMT

Today, if you hadn't noticed, is 20-10-2010 (unless of course you use the U.S. dating convention, in which case it's 10-20-2010, but never mind). And that apparently has moved the OECD to declare it World Statistics Day. Which moved us to offer this reprise of a guest column we posted on Dismal Scientist last year:

Who Cares About Federal Economic Statistics?

By Andrew Reamer in Washington, D.C.

Two years ago, the state of the federal government's system for gathering and maintaining economic statistics was like the name of this web site—dismal.

In response to former President George Bush's threat to veto what he viewed as excessive federal spending, Congress cut the budgets of a number of agencies, including three whose responsibilities include gathering the nation's vital economic statistics: the Census Bureau, the Bureau of Labor Statistics, and the Bureau of Economic Analysis.

These agencies didn't yield particularly large savings. Congress snipped some $35 million from the BLS and the BEA and delayed about $60 million for the Census Bureau, all to help cover a $22 billion gap in a $3 trillion appropriations bill.

Statistical values

Congress could order these cuts because most of its members don’t fully comprehend the value that the $1 billion federal economic statistical system provides to the nation. Data collected by government agencies guide fiscal and monetary policy in a $14 trillion economy and inform the investment decisions of 6 million U.S. firms. Without timely and accurate statistics, thousands of private and public agencies would be unable to successfully carry out efforts in transportation, education, healthcare, affordable housing, and economic, community and workforce development.

Congress’ actions pushed the federal statistical system, which had not been faring well for some time, into dire straits. Because of the budget cuts, in 2008, the Census Bureau couldn’t add new quarterly and annual data it planned to collect on the nation’s finance, insurance and real estate industries. As a result, the BEA now lacks optimal data for measuring economic activity in those areas that were at the heart of the recent recession.

The cuts also left the BLS unable to update its consumer price index survey with information from the 2000 census. The CPI's housing sample thus continues to be based on data from the 1990 census, which has created a visible, growing age bias in the sample.

There were other consequences of Congress' budget cuts as well.

The BEA said it would stop publishing industry subsector estimates for metro and county GDP and earnings. Researchers therefore would be unable, for instance, to track Detroit's dependence on auto manufacturing.
The BEA also halted the collection and publication of detailed state foreign direct investment data, despite protests from state economic development agencies, which depend on that information to help attract overseas firms.
The Census Bureau cut back and postponed the 2008 "dress rehearsal" for the 2010 census, leaving it unable to test its procedures and technologies for the upcoming decennial count.
The BLS killed current employment statistics for 65 small metro areas.
The Department of Housing and Urban Development discontinued the residential finance survey, which gathered data on mortgage debt, and had dramatically cut back the number of metro areas covered by the American housing survey, which examines local housing conditions and markets.

With only a $2 million appropriation, the Census Bureau’s innovative Local Employment Dynamics program barely dodged elimination and was relegated to pilot status. Starved for funds, the program could not realize its potential to use existing administrative records to track worker movement over time and space—knowledge that could transform how we understand the workings of our national and regional economies.

Properly funded, LED could show patterns of labor turnover by worker characteristics such as age, sex, race, industry and occupation, down to the community level. It could trace how workers fare after layoffs, shedding light on such questions as the fate of construction workers after housing markets collapsed. And the program could provide a demographically rich picture of where people live in relation to where they work, a valuable tool for business site location and transportation planning.

Turnabout

One year and a new administration later, the situation is markedly different.

In the budget for fiscal 2009, Congress gave the Census Bureau the $8 million it needed to collect data from finance, insurance and real estate firms quarterly and annually, rather than once every five years. The BLS also received sufficient funds to update the CPI housing sample and restore current employment statistics for the 65 small metro areas cut under the last Bush budget.

The American Recovery and Reinvestment Act gave the Census Bureau $1 billion to improve operations and beef up its "get out the count" efforts, to ensure a more accurate 2010 census. The Census Bureau also initiated a new Business Dynamics Statistics program that allows researchers to examine longitudinal trends in business development.

For fiscal 2010, the House and Senate are on the verge of agreeing to fund several important economic data improvements. Assuming budget passage, these positive developments are in store:

The BEA will improve its estimates of service industry contributions to GDP using the newly expanded Census Bureau services industry data.
The BEA will restore detail to regional NAICS for GDP and earnings and also create a new interarea price index to produce real measures of state and local area product and income.
The Census Bureau’s LED program will become permanent, with increased funding for significant enhancements. Among these would be a “job-to-job flows tool” allowing analysts to see how different categories of workers move among industries and regions over time.
The Department of Housing and Urban Development will receive a substantial increase in funding for improved housing statistics. In particular, HUD will expand the American housing survey and begin capturing residential finance data in a more timely way.
If the House agrees to Senate funding levels, the BEA would reverse cuts to the state FDI data program and the Economic Development Administration would create an industry clusters research and information center, including detailed cluster mapping.

Apart from this year’s appropriations process, agencies are pursuing several efforts to improve the statistical system. The BEA is exploring the creation of measures of economic well-being and sustainability. The Census Bureau has proposed collecting data needed to create a modern poverty measure as well as a new program to improve its longitudinal business datasets. The Census Bureau also is looking at ways to expand the sample size of the American Community Survey (to increase its reliability) and to improve its annual population estimates program. In addition, an administration-supported effort is under way to improve the accuracy, comparability and usefulness of economic statistics through a series of “data synchronization” activities across statistical agencies.

Looking ahead, however, the political and budget winds blow in different directions. The good news is that senior Obama administration officials understand the importance of reliable and extensive economic statistics. OMB Director Peter Orszag has written about using statistics to drive sound policy, for example.

Time to speak up

The bad news is that for the foreseeable future, Washington will be under enormous pressure to reduce spending. It is quite possible that the administration's understanding of the need for good statistics will not be reflected in the president’s upcoming budget proposals—unless data users weigh in. And if the past is a guide, Congress may well make cuts because it doesn’t naturally comprehend the nearly infinite economic return on a relatively small taxpayer investment in data collection and product development.

To a great extent, then, the future health of the federal statistical system is in the hands of data users. Historically, consumers of government statistics have had little direct contact with federal decision makers. Congress and the bureaucracy take data users' concerns seriously when they hear them, but they rarely do. If the federal statistics system is to sustain recent improvements and survive upcoming budget battles, data users need to make their case. Silence in this instance is the opposite of golden.

_____________________________________________

To be heard about funding or future plans for federal economic statistics, contact any of the agencies, congressional offices or membership associations listed below. Note that the BEA, the BLS, and the Census Bureau issue periodic calls for public comment on proposed new and revised data collections. Letters are taken seriously and become part of the public record.

Andrew D. Reamer is a Fellow with the Metropolitan Policy Program of The Brookings Institution and president of the Association of Public Data Users.

Grading the Policymakers

Wed, 13 Oct 2010 11:45 GMT

Mark Zandi discusses the European sovereign debt and the U.S. outlook with Bloomberg Television.

More Disappointment on Employment

Fri, 8 Oct 2010 09:53 GMT

The September jobs report was a downer. Mark Zandi joins the CNBC crew for a breakdown.

Details, Details

Mon, 4 Oct 2010 10:45 GMT

Will banks' mortgage mistakes stretch out the foreclosure crisis? Mark Zandi discusses with Bloomberg news.

Who Says Financial Innovation is Dead?

Wed, 29 Sep 2010 15:35 GMT

I'm not quite sure I believe this.

A German firm that installs and manages gold vending machines aims to introduce them into the United States this year as it expands rapidly to take advantage of demand for bullion in times of economic uncertainty.

Thomas Geissler, creator of the Gold to Go brand and chief executive of Ex Oriente Lux, told Reuters on the sidelines of the London Bullion Market Association conference that the company aims to issue a "couple of hundred" machines next year...

The machines, which update the gold price every 10 minutes to match international markets, take cash or credit cards and dispense small bars—including 1 gram, 5 gram, 10 gram and 1 ounce units—as well as coins such as South African Krugerrands, Australian Kangaroos and the Canadian Maple Leaf.

Even if it's true, what do you do with the stuff after you've got it?

When Cuts Expire

Wed, 29 Sep 2010 08:34 GMT

What should Congress do about the expiring Bush tax cuts? The NYTimes hosts a mini-symposium.

Down So Long It Looks Like Up

Mon, 27 Sep 2010 09:26 GMT

Is there any sign of a housing recovery? Celia Chen discusses with CNBC.

Debating the Policy Response

Wed, 22 Sep 2010 15:37 GMT

Mark Zandi, Alan Blinder and John Taylor make the case for and against the government's policy response to the recent recession at Wednesday's Senate Budget Committee hearing. Read the prepared testimonies here, or watch the hour-long hearing itself here.

It Ain't Over Till It's Over

Tue, 21 Sep 2010 10:57 GMT

The NBER calls an end to the worst recession in 70 years, and nobody smiles.

Visit msnbc.com for breaking news, world news, and news about the economy

Policy and the Recovery

Wed, 8 Sep 2010 09:06 GMT

What will Obama's latest tax proposals do for the recovery? Mark Zandi discusses the issues for fiscal policy here, and also on Bloomberg.

Facing the Nation

Fri, 3 Sep 2010 11:09 GMT

Another program note: This Sunday morning the economy will take top billing as Mark Zandi panels up with former CEA chair Laura Tyson and New York Times reporter Gretchen Morgenson on CBS' "Face the Nation." Check local listings for times.

Squawk Alert

Wed, 1 Sep 2010 10:25 GMT

Mark your TV calendar: Mark Zandi will be hosting CNBC's "Squawk Box" gabfest this Friday from 7 to 9 a.m. Not coincidentally, the August employment report is due for release at 8:30 a.m. Stay tuned.

Playing the Odds

Thu, 26 Aug 2010 12:45 GMT

Mark Zandi talks with Bloomberg about the odds of a double-dip recession.

Breakfast with the Monitor

Thu, 26 Aug 2010 09:45 GMT

Mark Zandi tells reporters at the Christian Science Monitor's breakfast why the stimulus worked, assertions to the contrary notwithstanding.

A Double Dip for Housing?

Mon, 23 Aug 2010 17:47 GMT

Mark tells CNBC that housing is already nearing a double-dip recession.

Regions at Risk

Thu, 19 Aug 2010 15:41 GMT

CNN's Money picks up on our latest update of the U.S. recovery status map, and contributes their own version here.

Fix 'em or Forget 'em?

Wed, 18 Aug 2010 08:28 GMT

Debating the future of Fannie Mae & Freddie Mac.

Tax Cuts, Pro and Con

Tue, 17 Aug 2010 09:12 GMT

The following appeared in the New York Times op-ed section Sunday, Aug. 15:

The Tax Cut We Can Afford

By MARK ZANDI

UNLESS Congress and President Obama act soon, Americans’ taxes will increase in 2011, when the cuts enacted under President George W. Bush are due to expire. Almost everyone agrees that this makes little sense given the economy’s fragility. But consensus ends there. The president supports permanently extending the current tax rates for all except the highest-income households, while Congressional Republicans want the entire basket of cuts to be made permanent. The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.

The president’s plan would be taking an unnecessary gamble with the struggling recovery. Businesses have only recently begun to add jobs, and they appear to be a long way from hiring fast enough to reduce unemployment. Even under the best of circumstances, the unemployment rate will remain near 10 percent well into next year. The high rate of joblessness has cast a shadow on the collective psyche that will only worsen with higher taxes, raising the already uncomfortably high odds that the economy will suffer a double-dip recession.

Sundays with Fox

Tue, 17 Aug 2010 08:39 GMT

Parsing the latest economic data on the cable TV network:

Potholes in Recovery Road

Fri, 13 Aug 2010 14:36 GMT

The latest monthly update of the U.S. Recovery Status map shows some areas are at risk of falling into a renewed recession.

The metro map shows which ones are at risk:

July Forecast Assumptions

Thu, 12 Aug 2010 15:05 GMT

Monetary policy

The Federal Reserve is not expected to begin raising interest rates—either the interest rate paid on reserves or the federal funds rate—until spring 2011. The initial rate hike will coincide with the point when the unemployment rate has begun to move definitively lower. Employment has stabilized, but job growth sufficient to bring down the unemployment rate on a consistent basis is unlikely until year’s end.

Inflation should also remain low and inflation expectations well-contained through at least spring 2011. Core inflation is already below the Fed’s implicit target range and will slow further in coming months given the nearly double-digit unemployment rate, high vacancy rates, and low utilization rates in manufacturing.

The Fed will effectively begin tightening monetary policy well before raising interest rates, however. It recently ended its purchases of mortgage securities, and the TALF, which had supported asset-backed securities markets, has also ended. Also, just prior to raising interest rates, policymakers will likely begin draining reserves through reverse repurchase agreements, in which the Fed effectively borrows from banks, and term deposits.

Policymakers will then be prepared to begin raising rates, hiking the interest rate on reserves and the federal funds rate simultaneously. The interest rate on reserves is likely to become the key target rate until the central bank successfully drains excess reserves. The funds rate is expected to end 2011 at 2% and to have normalized to just over 4% by year-end 2012.

Fiscal policy

The federal government’s fiscal problems remain enormous. The budget deficit ballooned to $1.4 trillion in fiscal 2009 and is expected to be a similar size this year. The cumulative deficit from fiscal 2009 to 2012 will be nearly $5 trillion.

This very poor fiscal situation reflects the expected ultimate price tag of more than $2 trillion to taxpayers for the financial crisis and Great Recession, equal to 14% of GDP. For historical context, the savings and loan crisis in the early 1990s cost taxpayers some $350 billion in today’s dollars, equal to almost 6% of GDP at that time.

Of the over $2 trillion cost of the financial crisis and recession, $1.3 trillion is the direct cost to the government of its response to the financial crisis. This includes the fiscal stimulus and what has been committed to support the financial system and the auto and housing industries, less what the government will eventually recoup in future asset sales. The weaker economy and resulting loss of tax revenues and increased spending to support those losing their jobs and other income support programs will cost the Treasury an additional $700 billion.

The budget outlook remains extraordinarily disconcerting even after the costs of the financial crisis abate, because the costs of the Medicare, Medicaid and Social Security programs will balloon as the baby boomers retire. President Obama’s recent budget proposal does not significantly address the nation’s long-term fiscal problems.

U.S. dollar

The European debt crisis and the global flight to quality are lifting the value of the U.S. dollar. Although the euro has strengthened a bit over the past month, it is still near $1.25, just slightly above its recent four-year low. The British pound is also under significant pressure, at around $1.50.The dollar is expected to strengthen further vis-à-vis the euro and pound through most of the year. The European economy is expected to slip back into a mild recession by early next year as a result of the recent crisis and the resulting fiscal restraint. The European Central Bank and Bank of England are thus not expected to begin normalizing their monetary policies until well into 2011. The ECB is purchasing sovereign debt to help quell the crisis, but is sterilizing those purchases; if conditions do not stabilize soon, it will likely increase them and may even decide not to sterilize, allowing interest rates to fall further.

The dollar is expected to drift lower beginning about this time next year when the euro and pound stabilize and the Chinese allow their currency to appreciate more quickly. The dollar is about 25% overvalued against the yuan, and while the Chinese will be slow to revalue, the economic logic for doing so is increasingly compelling.

Energy prices

The price of a barrel of West Texas Intermediate crude oil has weakened to below $75 in response to the European debt crisis and the implications for global growth and energy demand. This is despite the mounting disruptions to offshore drilling from the ongoing BP oil spill. Over the past two years, oil prices have ranged from well below $50 at the start of 2009, during the depths of the recession, to a record of almost $150 in the summer of 2008. Retail gasoline prices have declined to $2.70 per gallon, compared with an all-time high of close to $4.

Oil prices are not expected to slump much further, as the global economic expansion should remain intact and global oil producers will manage supplies. For all of 2010, oil will average $80 per barrel, and range as high as $100 over the next several years; this is consistent with trend global demand and supply fundamentals, abstracting from the world business cycle.

The likelihood for even higher oil prices is low given current significant global excess productive capacity for oil, particularly in Saudi Arabia. This supply is likely to come online if oil prices rise too high, too fast.

Natural gas will have trouble keeping up with oil prices over the next several years as a very substantial glut of gas has developed. Prices will average $6 per million BTU in 2010, and closer to $9 over the longer term.

Employment Watch

Fri, 6 Aug 2010 09:27 GMT

Pre- and post-game analysis of the July U.S. employment data:

Visit msnbc.com for breaking news, world news, and news about the economy

The Real Bailout

Wed, 4 Aug 2010 16:20 GMT

Wall Street Journal columnist David Wessel supports the Blinder-Zandi position that government averted Depression 2.0, but he also notes that the biggest cost to taxpayers came not in the bank bailout, but inthe rescue of Fannie Mae and Freddie Mac.

Most people believe big Wall Street banks got bailed out and continue to profit from low interest rates. That's true, but many banks have paid back taxpayers with interest. Fannie and Freddie, though, burdened by huge mortgage portfolios, have taken $145 billion so far. In a new analysis, Alan Blinder of Princeton University and Mark Zandi of Moody's Analytics put the ultimate price for saving them at $305 billion...

The government didn't nationalize the banks. Someday, it will sell its stake in GM. But it nationalized the mortgage market and hasn't found a way out. So taxpayers keep pumping money into Fannie and Freddie at a rate of greater than $1 billion a week.

Up With Cramdowns

Wed, 4 Aug 2010 15:37 GMT

As the foreclosure crisis drags on, one potential cure is getting a new look—from researchers if not (yet) from policymakers. It's called the cramdown, and it's long been a bugaboo to lenders. More than year ago, indeed, legislation that would have allowed cramdowns was defeated in the U.S. Senate.

But now, two analysts from the Cleveland Fed suggest it could be just the thing to help stabilize the mortgage market:

Allowing bankruptcy judges to modify mortgages secured by primary residences remains one of the most contentious proposed responses to the ongoing home mortgage foreclosure crisis. After all, any legislative reform that allows bankruptcy judges to strip down debt secured by primary residences can potentially alter the terms of financial contracts, a change that could have unintended consequences.

The debate is not a new one. The 1980s farm foreclosure crisis sparked similar proposals and concerns. Congress’s response was to include a stripdown provision in a newly created chapter in the bankruptcy code specifically intended for family farms. The effects of that stripdown provision, in place for more than two decades, on the availability and terms of agricultural credit suggest that there has been little if any economically significant impact on the cost and availability of that credit.

Mornings with C-SPAN

Mon, 2 Aug 2010 11:29 GMT

C-SPAN's Washington Journal opens the floor to discussion of Mark Zandi and Alan Blinder's paper on U.S. policy in the recession.

More on Policy and Recession

Fri, 30 Jul 2010 12:38 GMT

The Zandi-Blinder paper has sparked widespread debate about the government's success (or not) in preventing the Great Recession from turning into something worse. A sampling from the blogosphere:

From E21, a right-of-center policy blog:

the Blinder/Zandi paper concluded that the TARP stabilization measures combined with the Fed’s quantitative easing had a greater positive effect on subsequent economic growth than the Obama stimulus. It is important that these sets of policies be treated separately when quantifying the effect of overall government intervention. There is a profound difference between policies designed to prevent a collapse and those designed to speed the pace of recovery. Viewing these policies as parts of the same “government intervention” trivializes distinctions that are central to the lessons policymakers should draw from the response to the crisis.

While from the left, Dean Baker opines:

While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.

Ezra Klein muses about models:

My interviews with Alan Blinder and Mark Zandi focused, probably to the great boredom of my readers, on the nature of the model they used to estimate the effects of different stimulus and financial policies. I did that because this question of models is an important one: If you believe the macroeconomic models, they say the stimulus has worked extremely well. If you don't, then it's harder to answer.

And a blogger named Dr. Duru says he's been convinced:

Despite my skepticism, I was prepared to give this research a try because I have found Zandi’s past economic commentary to be generally insightful and, most importantly, devoid of the ideological rants or dogma that seem to plague too much economic analysis. Still, I was prepared to nitpick at every flaw and find reasons to cling to my skepticism. Instead, my doubts about the efficacy of stimulus and monetary policy were eased a little by this well-structured and carefully considered study.

Parsing the Second Quarter

Fri, 30 Jul 2010 12:25 GMT

Mark Zandi discusses second quarter U.S. GDP with Bloomberg TV.

Of Models, Stimulus and the Great Recession

Thu, 29 Jul 2010 08:31 GMT

Nice discussion here between the Washington Post's Ezra Klein and Mark Zandi on how the Moody's Analytics model shows that U.S. policy staved off a second Great Depression. A snippet:

Your results suggest that the financial rescue was, if anything, even more significant than the stimulus. It’s since become wildly unpopular, but you’re saying that George W. Bush and Hank Paulson deserve some credit for the policies they created in the immediate response to the crisis.

Absolutely! I think TARP was incredibly important. The mistake was for Congress to vote it down initially. That eviscerated confidence and took the equity market down to a whole other level and exacerbated our problems. By that time, the damage was so serious that the intent of TARP had to shift. Originally, it was about buying bad assets, which would’ve been more graceful. But because of the no vote and the damage it did, they had to make TARP a source of capital for the financial system. The capital purchase program was ultimately the one key thing that was necessary for stabilizing the financial system and the economy.

Klein's companion discussion with Alan Blinder is here.

Elswhere, PBS interviewed Zandi and Blinder on the Nightly Business Report:

SUZANNE PRATT: So Alan, let me start with you. Those policies include everything from TARP to the Fed's purchase of mortgage-backed securities. Which was most important do you think for the economy?

BLINDER: It also included the fiscal stimulus. But what we found, somewhat to our surprise, we didn't know going into the work, that at least according to this model, the panoply of financial policies, including the things that you mentioned and other things were actually more important quantitatively than the fiscal policies -- the stimulus, the tax rebates of 2008 and so on.

Meanwhile, the Blinder-Zandi paper continues to draw attention, both supportive and critical. No matter how you view it, however, isn't it refreshing to see real economic issues getting some airtime?

Facts and Counterfacts

Wed, 28 Jul 2010 11:10 GMT

Mark Zandi discusses the new stimulus study with the Squawk Box crew on CNBC.

How the Recession Was Beaten

Wed, 28 Jul 2010 09:19 GMT

The blogosphere is all atwitter this morning about this.

How the Great Recession Was Brought to an End

by Alan Blinder and Mark Zandi

The U.S. government’s response to the financial crisis and ensuing Great Recession included some of the most aggressive fiscal and monetary policies in history. The response was multi-faceted and bipartisan, involving the Federal Reserve, Congress, and two administrations. Yet almost every one of these policy initiatives remains controversial to this day, with critics calling them misguided, ineffective, or both. The debate over these policies is crucial because, with the economy still weak, more government support may be needed, as seen recently in both the extension of unemployment benefits and the Fed’s consideration of further easing. In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11½% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.

The full text is here. The New York Times summarizes it here. Bloomberg's version is here. Notable bloggers comment here and here. The Dallas Morning News weighs in here. CNBC discusses here. Britain's Guardian joins in.

Update: The critics weigh in, here and here.

Forecast Assumptions

Tue, 27 Jul 2010 16:08 GMT

Monetary policy. The Federal Reserve is not expected to begin raising interest rates—either the interest rate paid on reserves or the federal funds rate—until spring 2011. The initial rate hike will coincide with the point when the unemployment rate has begun to move definitively lower. Employment has stabilized, but job growth sufficient to bring down the unemployment rate on a consistent basis is unlikely until year's end.

Inflation should also remain low and inflation expectations well-contained through at least spring 2011. Core inflation is already below the Fed's implicit target range and will slow further in coming months given the nearly double-digit unemployment rate, high vacancy rates, and low utilization rates in manufacturing.

Fiscal policy. The federal government's fiscal problems remain enormous. The budget deficit ballooned to $1.4 trillion in fiscal 2009 and is expected to be a similar size this year. The cumulative deficit from fiscal 2009 to 2012 will be nearly $5 trillion.

This very poor fiscal situation reflects the expected ultimate price tag of more than $2 trillion to taxpayers for the financial crisis and Great Recession, equal to 14% of GDP. For historical context, the savings and loan crisis in the early 1990s cost taxpayers some $350 billion in today's dollars, equal to almost 6% of GDP at that time.

The budget outlook remains extraordinarily disconcerting even after the costs of the financial crisis abate, because the costs of the Medicare, Medicaid and Social Security programs will balloon as the baby boomers retire. President Obama's recent budget proposal does not significantly address the nation's long-term fiscal problems.

U.S. dollar. The European debt crisis and the global flight to quality are lifting the value of the U.S. dollar. Although the euro has strengthened a bit over the past month, it is still near $1.25, just slightly above its recent four-year low. The British pound is also under significant pressure, at around $1.50.

The dollar is expected to strengthen further vis-à-vis the euro and pound through most of the year. The European economy is expected to slip back into a mild recession by early next year as a result of the recent crisis and the resulting fiscal restraint. The European Central Bank and Bank of England are thus not expected to begin normalizing their monetary policies until well into 2011. The ECB is purchasing sovereign debt to help quell the crisis, but is sterilizing those purchases; if conditions do not stabilize soon, it will likely increase them and may even decide not to sterilize, allowing interest rates to fall further.

Energy prices. The price of a barrel of West Texas Intermediate crude oil has weakened to below $75 in response to the European debt crisis and the implications for global growth and energy demand. This is despite the mounting disruptions to offshore drilling from the ongoing BP oil spill. Over the past two years, oil prices have ranged from well below $50 at the start of 2009, during the depths of the recession, to a record of almost $150 in the summer of 2008. Retail gasoline prices have declined to $2.70 per gallon, compared with an all-time high of close to $4.

How Are We Doing?

Thu, 22 Jul 2010 11:07 GMT

Sometimes the simplest questions draw the best answers. Harlan Levy illustrates with Andres Carbacho-Burgos at Seeking Alpha:

H.L.: How is the U.S. economy doing?

A.C-B.: In the U.S. we’re seeing a recovery which is starting to slow because the fiscal stimulus is petering out. The majority of those funds have now been dispersed and will run out this year.

Another Inconvenient Truth

Wed, 21 Jul 2010 17:04 GMT

If it's true that the definition of a gaffe in Washington is telling the truth in public, then Mark Z. just might have gaffed big-time. The WSJ reports:

Moody’s Analytics Chief Economist Mark Zandi has some bold advice for the housing industry: It should push to limit the mortgage interest and property tax deductions that have helped to fuel U.S. home sales for decades.

And the industry shouldn’t be shy about its support for such action either, Mr. Zandi argued Wednesday in Washington. Rather, it should “get out ahead of this” and “lead the way,” he said.

Scaling back such deductions is “the most logical way” to help plug the budget deficit and reduce the federal subsidy for housing, Mr. Zandi said

Assessing Damage in the Gulf

Mon, 19 Jul 2010 16:13 GMT

Marisa Di Natale discusses a new report on the impact of the Gulf oil spill with Fox Business News.

Explaining UI

Fri, 16 Jul 2010 09:18 GMT

Sophia Koropeckyj gives NPR an earful about the economic importance of support for the jobless.

The Recovery Rolls On

Thu, 15 Jul 2010 11:24 GMT

More U.S. metro areas are moving from recession to growth, Andrew Gledhill reports:

While Steve Cochrane explains which regions are moving ahead fastest, and why.

Credit Scorecard

Wed, 14 Jul 2010 15:38 GMT

Not surprisingly, the creditworthiness of U.S. consumers has taken a beating. Cris deRitis explains why to the LA Times.

Consumers with low credit scores will have increased difficulty obtaining credit cards and other loans, said Cristian deRitis, director of credit analytics at Moody's Analytics.

A high national unemployment rate — 9.5% in June — has helped drive down scores, DeRitis said. "Delinquencies are on the rise. People out of work are not making payments on debts, and that negatively impacts their scores," he said.

Many people also have high credit balances when compared with the total amount of credit available to them, DeRitis said. This trend, when combined with an inability to acquire more credit, has served as a "double-edged sword" for the economy, he said.

Viva Spain. Now Back to Work

Tue, 13 Jul 2010 09:44 GMT

From Sydney via India's NDTV, Matt Robinson weighs in on global recovery in light of Europe's continuing debt woes.

Back From Break

Mon, 12 Jul 2010 16:38 GMT

While DataPoints was on holiday, the debate over policy in the recovery took no vacation. At NPR's On Point show, Mark Z. squared off with other notables on the stimulus, the deficit, and what next.

Recalculating the Default Option

Wed, 23 Jun 2010 16:42 GMT

Is it rational to walk away from your underwater mortgage? Maybe, but for those considering the strategic default option, the calculation may have just become a bit more difficult. This from Fannie Mae:

Fannie Mae announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

Why U.S. Productivity Might Fall Off this Month

Wed, 23 Jun 2010 16:02 GMT

A random sample of U.S. office life this week, from the Business Insider.

Rethinking Homeownership (Again)

Wed, 9 Jun 2010 15:30 GMT

What seemed like a crazy thought a couple of years ago may be turning into a meme. Or a movement. We'll see. Anyway, pop-urbanologist Richard Florida apparently agrees that an optimal rate of homeownership exists, and that it's somewhere south of where ours peaked before the bust.

From Florida's WSJ op-ed:

Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery. My colleagues and I tracked homeownership levels across U.S. cities and regions to see how they correlate to other measurable demographic and economic factors ... [C]ities with high levels of homeownership ... had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.

UPDATE: The NYTimes' Joe Nocera joins the club. What shall we call it? His headline suggests an answer: The Wake-Up-Time Club...

The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.

Two Hundred Years

Tue, 1 Jun 2010 14:58 GMT

This is likely the coolest graphic you'll see this week, if not all summer.

"Gapminder" has an interactive history of the past 200 years, told in the form of a bubble chart tracking income per capita and life expectancy for the world's nations.

The three screen shots here offer a rough outline, but to really appreciate it you need to click through and hit "play."

A bracing antidote to today's gloomy headlines follows.

Once Around the Rink

Thu, 27 May 2010 08:37 GMT

Mark Zandi summarizes the current outlook and reveals he's a Flyers' fan.

Taking a Breather

Wed, 26 May 2010 10:52 GMT

Mark Zandi and Simon Johnson help New York public radio decide just how much nervousness is appropriate right now.

Talking Politics

Wed, 26 May 2010 09:48 GMT

Memorial Day may mean beaches and barbecues, but it also means November is less than 6 months away. And the economy will clearly be a major driver of this year's U.S. midterm election results. Gus Faucher looked ahead recently with Chris Satullo of Philadelphia's public broadcasting outlet WHYY:

Sausage Being Made

Fri, 21 May 2010 16:07 GMT

Mark Zandi, whose views on financial regulatory reform are outlined here, gives Marketplace a quick update on the action in Congress.

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On Air in the Big Apple

Thu, 20 May 2010 08:33 GMT

Mark Zandi discusses financial regulatory reform and the prospects for U.S. recovery with New York public radio host Brian Lehrer.

Belated Horn Tooting

Mon, 17 May 2010 16:34 GMT

Away last week, we missed this bit of recognition from Market Watch for our forecast team. Never too late, however:

Over the past year, the top economists are, in order: Nigel Gault and Brian Bethune of IHS Global Insight; the team at RBS Securities now led by Michelle Girard and formerly headed by Stephen Stanley; Maury Harris's team at UBS; Spencer Staples of EconAlpha; Aaron Smith and Ryan Sweet of Moody's Economy.com; Peter D'Antonio of Citigroup; Ethan Harris's team at Bank of America Merrill Lynch; David Wyss and Beth Ann Bovino of Standard & Poor's; Lou Crandall of Wrightson ICAP, and John Silvia's team at Wells Fargo Securities.