Wells Fargo Economist Predicts Severe Economic Recession But Late 2009 Recovery

The U.S. is entering its steepest, most severe recession since the early 1980s, but the nation’s productivity plus strong global demand for American commodities will revive the economy by late 2009.

Wells Fargo senior economist Michael Swanson delivered that forecast to 400 dairy producers and industry representatives at the Elite Producer Business Conference in Las Vegas this week.

“Long term, I am bullish about the U.S. economy,” Swanson said. He projects a return to the long-term growth of the Gross Domestic Product at 3% or higher.

His bearish outlook for the near-term stems in part from consumers’ fear of the unknown, which has deflated their desire to spend, he said. This year marks the first time since 1991 that the U.S. has seen a contraction in personal consumption spending.

In addition, businesses have taken on heavy debt and now need more equity to restore their strength. “They’ll have to get costs under control to de-leverage their positions,” said Swanson.

Among those who must de-leverage are farmers, Swanson said. He foresees the cost of money increasing and asset values taking a hit. Lowering debt “has to be part of your goal, so you can call the shots, not your banker,” he said.

Efforts by the Federal Reserve and the U.S. government to stimulate monetary and fiscal activity are temporarily good, but payback will follow, predicted Swanson. That will mean increased inflation and market volatility.

“Cheap money won’t last,” Swanson said. “The Federal Reserve will raise interest rates.”

The downturn in housing and accompanying financing woes are big contributors to the economic situation, said Swanson. Homes were over-priced, but pricing assets correctly can help fix the problem.

With a $300 billion improvement since 2005, “net trade has been a bright spot in the U.S. economy,” Swanson said.

The recent decline in oil to the $60-per-barrel range is likely temporary. Longer term, oil prices will rise again to the $100 level, helping boost ethanol demand. “That will make it tough on feed costs,” he said.

The Elite Producer Business Conference is presented each year by Dairy Today.

Catherine Merlo is Western editor for Dairy Today. You can reach her at cmerlo@farmjournal.com.