Forecasters share predictions for economy's outlook in 2009

Auto sales in the USA are expected to be even worse in 2009 than in 2008, reflecting the lower sales volume that hit at the tail end of this year. Estimates range from 11.5 million to 12.5 million for 2009, a far cry from the 17 million-a-year sales level in 2001, the Detroit 3 automakers said in testimony this month as they sought a federal bailout.

Consumer spending accounts for over two-thirds of U.S. economic activity. DeKaser and analysts at Barclays Capital, UCLA and John Hancock all expect spending to increase in the April-June quarter. One thing that will help is the sharp drop in prices of commodities, particularly gas. "It's one of the good pieces of news that's out there," says IHS Global Insight chief economist Nariman Behravesh.

4. Business spending

Businesses are expected to cut spending dramatically through much of 2009. A number of economists, including those at Citi, UCLA, National City and Wachovia, don't expect business investment, which accounts for about one-tenth of U.S. economic activity, to decline through 2009.

According to a survey of 679 chief financial officers by Duke University and CFO Magazine this month, U.S. businesses expect to cut capital spending by more than 10% in the next 12 months, a sharp deterioration from September, when the CFOs expected business investment to increase slightly.

John Graham, finance professor at Duke and director of the survey, says businesses are finding ways to repair existing machinery and buildings rather than replace equipment or move. They likely won't increase their spending until they see concrete evidence the economy is on the mend.

"Some people are doing it because the business is just not there," Graham says. "Other companies are potentially cutting back even as a precautionary measure."

Also holding back businesses is the lack of access or high cost of credit, Graham says.

Robert Safro, president of LOGOmotion, a Bethesda, Md.-based company that creates marketing materials such as coffee mugs and tote bags for conferences and businesses, sees a great deal of caution from his clients.

Those planning meetings for late winter and early spring are either buying fewer or less-expensive items, or they're not buying at all. One client who usually spends about $80,000 on a conference each year is spending half that.

"I'm concerned," Safro says.

Robert Coen, director of forecasting at media-analysis firm Magna, predicts a 4.5% drop in ad spending to $259 billion in 2009 on the heels of a 3.2% drop in 2008.

"A recovery in U.S. ad budgets will probably not get underway until 2010," he says.

Another negative for 2009: There aren't any big ad-spending events such as the Olympics or national elections.

Declining business spending will hurt a number of industries but will be especially tough for the manufacturing sector. Nearly two-thirds of manufacturers expect revenue to be unchanged or lower in 2009 than 2008, a survey from the Institute for Supply Management found.

5. Prices

Concerns about inflation are so 2008. In 2009, deflation worries are expected to dominate the pricing landscape.

With the economy in a slump, prices are falling for a variety of goods — prompting worries that the economy could sink into a deflationary spiral. Deflation is a broad, sustained decline in prices that is hard to stop once it takes hold.

If consumers expect prices to decline, they put off making purchases, thus crippling the already weak economy.

While many economists say the chances of deflation are remote, the Federal Reserve is taking no chances.

Tuesday, the Fed slashed interest rates to near zero and vowed to keep them low while also pledging to plow money into the financial system to unlock lending and boost the economy.

Concerns about deflation will make the Fed "all the more aggressive," says Comerica's Johnson, arguing that although price pressures are abating, the chance of outright deflation is remote.

Still, "That is going to be a risk for a while given the severity of the recession."

Contributing: Jayne O'Donnell and Stephanie Armour in McLean, Va., Sharon Silke Carty in Detroit and Laura Petrecca in New York

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