Oct. 13, 2009 – 2:38 p.m. CT

Unchartered Waters

I just spent the last three days at the 51st annual meeting of the National Association for Business Economics. Here are a few highlights:

• The economy is in a very muted recovery. The risk of a double dip has diminished, but not disappeared. We are expecting the weakest recovery, relative to the depth of the recession, of any post-WW-II period. The primary reason is the healing, but still ill, financial system.
• Uncertainty about the outlook has dissipated, but remains higher than it has been during the rest of the post-WW-II period.
• The crisis was years (decades) in the making, and will take years and years to repair.
• The risk of a financial crisis has not diminished and we may actually already be fueling additional bubbles.
• A second stimulus package is becoming more likely, especially given the dynamics of the 2010 election season.
• The Fed is more concerned about disinflation than accelerating inflation in the near term. Their balance sheet will continue to expand rapidly during the first half of the year. There is no hurry to raise rates. However, criticism that they held rates too low for too long after both the 1990-91 and 2001 recessions will prompt them to raise rates much sooner than they did during previous recoveries.
• The dollar is expected to further weaken, but the reserve status of the dollar remains strong.

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