Kiplinger Connection
The Economy • Global Outlook • Climate Change

The Economy: No quick fixes for the president-elect.
Global Outlook: China’s stimulus is not enough; Europe is dragging.
Climate Change: Will cap and trade stimulate alternatives?

The Economy
When Barack Obama takes office Jan. 20 ...
He’ll face the worst economy in decades ...
With no hope of a quick or easy recovery.

First quarter 2009 GDP will likely drop 2%, following a 4% dive in 2008’s final quarter. That’ll be the biggest contraction since Reagan’s start, when the U.S. weathered eye-popping drops of 4.9% at the end of 1981 and 6.4% at the beginning of 1982. Back then, joblessness and inflation were far higher, but credit markets weren’t iced up as they are now, and most consumers were carrying a lot less debt.
Expect 2 million jobs to disappear in 2009. And that doesn’t include the additional job losses that will result if one of Detroit’s auto firms folds.
Unemployment will top 8% by Dec. 2009.

This recession is more serious than most.
Typically, they get ugly fast and then end.... through surges in home building and manufacturing. The Federal Reserve cuts rates and jobs are created. Soon consumers start spending, and recovery begins.
Not this time. There aren’t any quick fixes.
Obama’s team is eyeing a massive stimulus, perhaps $500 billion or more. It will include permanent middle-class tax cuts, an extension of jobless benefits, additional funds for food stamps, and aid to states for Medicaid as more workers lose insurance benefits along with their full-time jobs.

Infrastructure spending will spark a big fight. Obama wants much more, including investments in alternative energy. Republicans say it will take too long to help the economy. But many Democrats say the recession will still be under way when the money kicks in, and the jobs will be needed to sustain a healthy recovery.
Another battle: The deficit, which is spiraling out of control. Next year, it will exceed $1 trillion, or 7% of GDP. That will top the modern high of 6% in 1983 but is still well shy of the record 30% set in 1943 at the height of World War II. And the national debt has nearly doubled in eight years ... to more than $10 trillion. Fiscal hawks say Congress can’t help everyone who needs it. But many economists are telling Obama to boost the economy first and worry about the deficit later.

One bright note: Obama can count on help from the Fed’s unused firepower. The federal funds rate is headed down to 0.5% by early 2009, and the Fed’s other tools will be used to keep pumping liquidity into the banking system to get lenders lending. Another important help to the economy will come from relatively low oil and gas prices. The difference between crude oil at $147 a barrel in July and $60 a barrel in November is like adding a percentage point to GDP for the year. If oil hovers near $80 a barrel in 2009, it’ll blunt the recession’s severity considerably ... a lucky break for everyone.

Global Outlook
China’s $568-billion stimulus is a big deal ... but not big enough.
Only $150 billion of it is new money, and it’ll be spread over two years. Most of the rest was set aside earlier for infrastructure and earthquake repairs.
The stimulus will help, but China needs to spend far more, much faster to keep GDP growth in 2009 from slipping below 8%, the minimum necessary to create jobs for those entering the workforce. A significant increase in jobless rates drives up the risk of unrest, threatening political stability and the ruling regime.
U.S. firms will see limited benefits from the new spending China does offer. Beijing will steer much of it to Chinese-owned firms, though some business will go to U.S. heavy equipment makers and health-care and engineering services firms.

Emerging markets may be next to bear the brunt of the financial crisis. Many banks and firms borrowed heavily in recent years, gobbling up lower rates from more developed nations. Now, with credit scarce, banks are calling in loans.
The larger and more responsibly managed economies will have a cushion. The Fed will provide Brazil, South Korea, Mexico, and Singapore with currency swaps worth about $120 billion. The International Monetary Fund will offer easy loans.
But it may not be sufficient. The IMF has a $250-billion reserve fund, but the amount needed to stem the emerging markets crisis could total $1 trillion.
The top risk: Eastern Europe, which would drag down the euro zone, too. German, Austrian, and Swiss banks are heavily exposed, and the east is a top market for euro zone exports. Plus the worse the euro zone gets, the more U.S. firms suffer.

Climate Change
A cap and trade bill for greenhouse gases is coming, by 2010 at the latest.
Many Republicans will object to putting new burdens on the economy during a recession. Such a bill would require utilities to spend billions of dollars for new equipment, driving up electricity bills for consumers and businesses.
But supporters will argue that new regulations will provide a needed boost by forcing companies to invest in infrastructure, creating thousands of new jobs. That jibes with Obama’s promise to spend $15 billion on alternative energy in 2009.
And the alternative would be an expensive patchwork of state programs. Other states will follow California in regulating emissions once Obama lifts Bush’s ban, unless Washington takes the lead. For many, a federal rule would be the lesser evil.