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Economist sees big movement in economy

Mar 13, 2008 10:52 AM, By Lamar James
Arkansas Extension Specialist

The global economy will strengthen after 2011 as America enters what could be “an amazingly dynamic economic period, a period unlike any ever experienced in world history,” said Bobby Coats, an Extension agricultural policy analyst with the University of Arkansas Division of Agriculture.

“I surely thought we were going to talk ourselves into a recession for a while,” he said. “Consumer confidence is of utmost importance to domestic growth. I was afraid all the doom and gloom discussions would erode consumer confidence to the point consumers and businesses reduced spending and put the U.S. economy in danger of slipping into a recession.”

While a recession is possible, Coats expects the next 18 months to show more domestic and global strength than weakness because of financial stimulus packages, continued worldwide growth and momentum.

Coats’ crystal ball indicates economic weakness in 2010 and 2011, which would then be followed by increasingly strong global growth.

One problem Coats worries about is inflation caused by stimulus packages designed to spur the economy. “In the current economic setting, the financial stimulus will be inflationary, so everyone should consider how to manage in a world of faster-than-normal rising prices. Inflation isn’t good, but the alternative — deflation or falling prices — isn’t really an option.”

It appears the sub-prime home loan crisis will be managed, but at a cost. Coats believes that credit problems will become an increasing problem that spills over into car loans and credit cards.

The recipe for a solution to the growing credit problem will take many ingredients: time, sound business practices, continued economic stimulus, available and reasonably priced credit, consumer confidence and production or manufacturing job growth.

In addition, he said, consumer savings is going to have to take priority over consumer consumption.

U.S. agriculture has benefited in this new economic situation. Strong global demand for agricultural commodities, continued dollar weakness, and an expanding renewable energy market has created a growing demand for all major U.S. commodity groups. Those factors coupled with inflationary expectations offer a reason why agricultural commodity prices are on a tear.

However, Coats observes that farmers’ costs are up about 50 percent since 2002. “Beyond their obvious value to society, food, feed and fiber commodities, as an investment (these things) are increasingly valued assets to large and small investors. This increases speculation and price volatility,” he said.

“When too much money is chasing too few commodities, prices can be driven to extreme historic levels. We see this today and the euphoria has yet to climax. U.S. agricultural exports are expected to reach $101 billion in 2008 up from $81.9 billion in 2007.”

Row crop commodity prices appear to have continuing price strength, so producers should continue to enjoy pricing opportunities for their 2008 and 2009 crops, according to Coats. Live cattle, feeder cattle and hogs should see real price improvements in the second half of this year.

Meanwhile, the high price of oil continues to cause sticker shock in Americans. But it’s sending a positive message about the global economy.

“The price of oil is telling us that global financial stimulus to date is sustaining reasonably strong global growth and momentum and the demand for oil. Continued strong global demand, a weak dollar and risk and uncertainty about a number of supply related issues are all factors that continue to give oil prices support.”

e-mail: ljames@uaex.edu