Economic Insights

What is shaping up as the deepest and longest recession since the 1930s will most likely end in the second half of 2009. 

The ongoing impact of $2 trillion in government stimulus, with other factors such as pent-up consumer demand and returning consumer confidence, will finally lead to a turnaround, and the third quarter of next year will be "better than expected" by many. It's like starting a fire and you're trying and trying to get your flame going and you keep blowing on the flame and all of a sudden it goes 'poof!

I feel that the housing sector will lead the way. One bright note is that the sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out.

Monetary policy should be augmented with fiscal policy

Current monetary policy will help only those households that do not need help - those that have plenty of money and have a stable job. They will refinance, buy homes and consume. It will not help those who are struggling to make ends meet, or have lost their jobs or may soon lose them, because no financial institution is going to lend them money to buy a home, no matter what the interest rate is. It is up to the new administration to help these households through fiscal policy, with government spending that will create jobs.

The current job market is one of the worst in decades, with another 3.7 million jobs expected to be lost next year. That means that job losses in this recession will total 5.5 million, twice as many as were lost in the 1981-1982 recession, the second worst since World War II. I expect the unemployment rate to rise to 8.8 percent by the end of 2009 and to average 8.2 percent for the year. Deflation will also occur. Gross domestic product will decline in the first two quarters before expansion resumes in the third quarter.

Paulsen blamed "fear mongering" by government officials to persuade Congress to pass the $700 billion Troubled Asset Relief Program in the fall for the depth of our problems today. That, he said, "froze everyone in their tracks" and resulted in "economic paralysis."

Factors leading to recovery - and long-term issues it will create

Paulsen predicted confidence will begin to return in the first half of next year, helped by "the consumer who waited to buy a car and is definitely going to need one."

The U.S. government will provide the primary support for the economy in 2009. This will come in a stimulus package from the new administration with infrastructure spending and middle-class tax cuts, plus "natural stabilizers" such as unemployment benefits, food stamps and other welfare payments. The infrastructure spending will be too narrow to help everyone, he said - but the middle-class tax cuts will offer more sustained consumer spending than recent one-time stimulus checks. Savings rates may also rise to 5 percent.

The economists worried about the long-term effects of government spending, likely to result in tax increases and inflation. "The U.S. government has plenty of 'cheap' financing to help the economy forward. This is going to be very expensive and will require higher taxes in the future, but the alternative is even worse. For the foreseeable future, we can expect economic growth to remain anemic - or until markets forget about past mistakes and start building the structure for the next big bubble.

Heath Lefort has his BA in Finance & Economics from St. John's University in Queens NY.  He analyzes and forecasts international, national and regional economic trends with a focus on macro-economic and interest rate forecasting, financial markets, international economics and the overall economy.

Treasurys were little changed Thursday, with benchmark 10-year note yields still at multi-decade lows, as a report showed initial claims for unemployment benefits unexpectedly fell in the latest week.

Ten-year note yields fell 1 basis point, or 0.01%, to 2.65%, the lowest since the 1950s.

Initial claims fell 21,000 to total 509,000 in the week ended Nov. 29, the Labor Department said. However, continuing claims, an indication of the difficulty of finding a new job, increased to the highest since December 1982.

"The claims data are pointing to the hardest landing, at least so far as employment is concerned, since the early 1980s," said T.J. Marta, fixed-income strategist at RBC Capital Markets.

Reports that the government is considering steps to lower mortgage rates also helped out U.S. debt, as investors speculate the government may buy Treasurys directly to lower the yields, which serve as benchmarks for mortgage loans.

Federal Reserve Chairman Ben Bernanke said Thursday that "more needs to be done" to stem foreclosures, including possibly having the government buy mortgages in bulk and refinance them.

Treasurys had moved higher before the jobless claims report, following interest rate cuts by the U.K., the European Central Bank, Sweden, New Zealand and Indonesia.

Shorter-term maturities are under more pressure, as yields are also near record lows.

Two-year note yields rose 3 basis points to 0.92% after touching 0.85% earlier this week, the lowest in at least three decades.