What do the experts say?

Fifty economists from various investment and academic institutions regularly conduct a notable economic survey. They compile their findings and analyses in a review called the Blue Chip Economic Forecast®. For the purposes of this article, we will focus on information from the June 10 issue. In order to understand the current state of our economy, we will define and review four of these economists’ findings, which include gross domestic product, inflation, unemployment, and interest rates.

First, to understand the health of our economy, it is important to understand Gross Domestic Product (GDP). GDP measures all goods and services that a country makes within its borders during a year. It’s an important measuring tool that helps determine the health of a nation’s economy. It’s also a good measuring stick for our standard of living. For example, from 1973-2009, the U.S. economy grew, on average, 2.8% annually. Therefore, we can consider 2.8% growth as normal for our country. Of these 50 economists, even the most optimistic do not believe that we will be back to this rate of growth at the end of 2010. Some doubt that we will even reach 1% growth by the end of 2010. In short, a sizable group of experts is forecasting that the economy as a whole will grow quite slowly through 2010.

The second category to define and review is the Consumer Price Index. The CPI measures the cost of all the things we buy. This is important, especially in your business. When the CPI goes up, we call that inflation. If inflation goes up, so do your overhead expenses (supplies, labs, etc). Lately, there has been a lot of talk about inflation, and how the endless amounts of cash that the administration has pumped into the economy is going to send inflation through the roof. The majority of respondents to the survey disagree. Of the 50 economists that forecast inflation, none of them believes that inflation is a short-term threat. Inflation occurs when all prices of goods and services rise, and usually happens when the economy is growing at a faster rate than normal. Do you recall how the economists do not expect GDP to grow through 2010? If people are not buying stuff, we’re not going to see higher prices. This doesn’t mean they don’t see problems out in 2011, however. Prices are likely to rise eventually, the speed of which depends on how quickly the economy grows, and how the administration deals with that growth.

The next category is interest rates. Interest rates can be measured in many ways, but one of the most common is by forecasting the 10-year Treasury note. Since the 50 economists expect economic growth over the next 18 months to be quite slow, and inflation to be minimal, they do not expect to see interest rates to raise significantly either. The pessimists of the group anticipate a lowered treasury note to 3.43% and the optimists expect that rate to be just over 4%. If we see a lot of economic growth, or if we see inflation take off, these rates could be higher, but remember, neither of those two scenarios looks likely to the 50 respondents.

The last category we’ll discuss is unemployment. Unemployment rates trend upwards, even after a recession is over. That’s because employers don’t usually start laying people off until well into a recession. If their businesses are struggling, they’ll first look at improving their marketing campaigns, sales, etc. Early in a recession, people don’t realize they are actually in one. After a recession is over, employers typically don’t hire people until they have had some stable growth for a while. The most optimistic forecasters see unemployment at 9.4% at the end of 2010, but it could also be much worse—25% of responders see unemployment over 10% by the end of 2010.

Some conclusions to draw

At the end of the day, there are several different economic scenarios we could experience. Investors (as well as financial advisors) don’t know with absolute certainty what to expect. It could be a more moderate, middle-of-the-road prediction that wins out in the end. Assuming this group’s consensus means something, then we can arrive at some concrete conclusions.

First, it doesn’t make sense to “inflation-proof” your portfolio too quickly (e.g. don’t go out and load up on gold just because someone on the radio says you should).
Second, returns to the safest assets (like the 10-year treasury note) are not likely to see much reward unless the more pessimistic scenarios end up on top. A flight to safety at this point isn’t likely to be heavily rewarded. Don’t completely abandon asset classes that may benefit from strong domestic and foreign economic activity.
Third, focus on your target. Running a dental practice can be very time consuming. Docs don’t often take the time to create a solid investment strategy. A solid investment strategy is more than just owning securities. It’s important to understand your objectives, your time horizon, the costs of each investment, and how your investments will fluctuate in different environments.
If you can remain focused on your long-term financial strategy, you will dramatically improve your chances of reaching your financial goals. Just remember to take in the information around you, focus on a target, and don’t let any distractions get in your way.