It may be a decade before Dow's back to 12,000, oracle says

McClatchy NewspapersMarch 5, 2009 

WASHINGTON — When Republicans and Democrats in the nation's capital want to make a point about the economy, they often cite Mark Zandi. A middle-of-the-road economic forecaster who speaks in plain English, Zandi increasingly has become the economic oracle of record.

The chief economist of Moody's Economy.com sat down Thursday with a small group of reporters and offered a sobering view of what he sees ahead for the U.S. and global economies.

The short version: It could be a decade before the Dow reaches 12,000 points again, the economy will grow much more slowly than the Obama administration envisions and larger, more controversial bailouts are likely to be coming soon.

Here are some of Zandi's thoughts, edited into a question-and-answer format.

Q: Will things get worse?

A: Yes, measurably worse.

Q: The administration sees strong growth from 2011 to 2015, and a solid 3.2 percent next year. Agree?

A: I think those are roughly reasonable, but they are much too optimistic for 2009 and 2010.

Q: How bad will the job market get?

A: I think the peak unemployment rate will be 9.5 percent in Q2 (second quarter) of 2010. That will be consistent with total job losses of almost 7 million from the peak in December 2007 to the trough, which will be sometime in early 2010. . . . That's a quarterly average, so there will be a month that we hit a double-digit number. That won't be outside the realm of possibility.

Q: Are there bright spots?

A: I think the hallmark of the current downturn is how broad-based it is across occupations, industries and regions. You know, by our accounting 42 states are in recession . . . that leaves you eight states that are not. And they are all weakening very rapidly and they are mostly in the central part of the country, Texas being the largest of the eight. They are energy, ag and other commodity-producing economies, and they are still benefiting a bit from the very high prices that prevailed through last fall. Obviously they are weakening now because prices are down and exports of these products are falling.

Q: Are the only bright spots dimming?

A: It's very possible, in fact I'd say likely, that all 50 states will be in recession at some point in the next year or two, and that would be unprecedented. Certainly you'd have to go back to the Depression to find something like that.

Q: Could there be an unanticipated bounce-back?

A: There is dark pessimism, and clearly the risks are decidedly to the downside. But there is a scenario where things turn out better than anticipated, because everything hinges on confidence, sentiment, of business, consumers and investors. And it's possible that the policy response (bank rescues and stimulus spending) shows some progress by the summer.

And it won't take a lot to make people feel a lot better. For example, if you go from losing three-quarters of a million people (joining the unemployment ranks) in February to, say, only a quarter of a million people in July, even though that's Armageddon in other times . . . that's progress. And everybody will start to forecast that there will be a zero job decline come early next year. And we'll start looking at GE at $9 a share or a Miami condo for $200,000. . . . You may decide there is a lot of value, and things could turn more quickly than anticipated.

Q: What's behind the steep drops in stock prices?

A: I think the principal factor is investors are marking down their growth in earnings expectations. They were hoping for a recovery by the end of the year or at least a stabilization by the end of the year, and now I think everyone feels that it's not going to happen until at least 2010, so they've marked down their growth expectations.

Q: How long before the Dow Jones Industrial Average gets back above 12,000?

A: It could be a decade.

Q: A decade?

A: If I'm an individual thinking about the size of my nest egg and what I would need for retirement, I think the appropriate assumption is that I am going to get a 5 percent annualized return on my assets: house, stocks, fixed income, the whole shooting match.

Q: Is another economic stimulus needed, given that conditions are quickly growing worse?

A: I think it is likely. I think the debate starts late this year. The only complicating factor is then people are going to say, "The one a year ago didn't work. This one didn't work. Why is this going to work (now)?"

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