Leading economist sees solid growth in first half; tailing off in second half

The U.S. economy will enjoy solid growth through the first half of 2010, but growth will slow appreciably in the second half of the year once inventory levels have been rebuilt and the impact of government stimulus programs ebbs, one of the world's leading economists said Jan. 20.

Donald Ratajczak, who today serves as a consulting economist but for 27 years was director of the Economic Forecasting Center at Georgia State University, predicted that the economy grew by 4.2 percent in the fourth quarter of 2009, and will show growth of 3.5 percent and 3.1 percent, respectively, in the first and second quarters of 2010. However, he sees growth slowing to just 1.1 percent in the third quarter and 3.25 percent in the fourth quarter. All told, he sees growth in 2010 of about 2.5 percent.

Ratajczak expects brighter days in 2011 as the economy gains a firmer footing and an upcycle boosts buying, ordering, and shipping. "2011 is when you want to feel good," he told the SMC³ winter meeting in Atlanta.

Ratajczak said the economy went through near-unprecedented inventory liquidation in 2009 as the financial crisis led to a massive drop in orders and businesses that couldn't secure short-term financing after credit markets froze began dumping existing stock. In the second and third quarters alone, U.S. businesses liquidated $305 billion worth of inventories, he said.

The economy will benefit in the near term as inventories are replenished from unsustainable levels, Ratajczak said. However, that process will play itself out by mid-summer. Meanwhile, the economy remains on "life support," he said, and will not regain its health until the private sector begins creating jobs and growth is powered by wage gains rather than by government stimulus. He said that since the recovery began in July 2009, there have been only two months—July and November—in which growth has been fueled by private sector wage gains.

Ratajczak also noted that industrial capacity declined in 2009 for the first time since the depth of the Great Depression in 1932. He added that industrial capacity continues to erode and may not bottom out until the second half of 2010. In addition, commercial and industrial loans are declining by $20 billion a month, a sign that lending activity remains weak, he said.

What capital spending does occur will be in equipment and software, not in facilities such as warehouses, which Ratajczak said are already in oversupply. Facility values "have not yet bottomed," he said.

Consumers, whose spending powers 70 percent of economic growth, will not be of much help as they are more concerned with paying down debt and rebuilding their savings than going on buying sprees with their credit cards, he added.

"For the first time in my memory, the consumer is seeing debt reduction as a goal," Ratajczak said.

On the positive side, U.S. companies have boosted their cash flow by an astounding $250 billion since the recession took hold, meaning they have capital ready to deploy should they see an economic recovery take hold, Ratajczak said. He also expects a tailwind from benign oil prices, which will remain low due to a glut of oil and refinery capacity.

"I will not be surprised to see $65-a-barrel oil," he said. "I would be surprised to see $85-a-barrel oil." Oil prices closed Jan. 20 at $77.62 a barrel.

Ratajczak also expects the economy to create about 1 million more jobs by June than it has today. However, much of that job creation may come from 800,000 temporary jobs to support the taking of the 2010 census, he added.