UVA Darden Professor Predicts a Smooth 2015, Then Bumps

12 February 2015

U.Va. Darden School of Business Professor Alan R. Beckenstein, an economist who teaches in the Global Economies and Markets area, each year peers into the economic future. For 2015, he predicts a fairly solid year, possibly followed by a recession in 2016.

“I think a recession will come sometime during 2016 with a 50 percent probability,” said Beckenstein. “The last recession officially ended in 2009. Seven years is a long time.”

He has announced his predictions at annual “Economic Forecast” events with Darden alumni chapters in Charlottesville, Richmond and Washington, D.C.

Barring a major crisis in Europe or a bond market price crash, Beckenstein foresees a 3.2 percent real GDP growth in the period including the last quarter of 2014 through the third quarter of 2015. “The probability of a negative growth quarter by the end of 2015 is 25 percent,” he said.

He sees core inflation holding around 1.8 percent and unemployment dropping to 5.3 percent from its current 5.7 percent level.

As for the Dow Jones Industrial Average?  He’s predicting the Dow Jones Industrial Average will close on 31 December at 18,750 points. It’s currently been moving in the 17,200 to 18,000 range. Beckenstein adds that it is really impossible to forecast the timing of the market.  He focuses more on the volatility during the year. The bad news is the volatility rollercoaster will continue. He sees a 2,300 point spread between the high and the low for this year.

Overall, Beckenstein characterizes the American economy as fairly strong. “The U.S. is fundamentally strong despite the debt,” he said. “Americans are still a lot better off than Europeans.”

He said growth, in fact, was stronger in 2014 than expected by consensus forecasters (last year, Beckenstein was close to the target); the ECB’s commitment to the euro staved off a disaster, and there’s real growth behind the steadily declining unemployment rate.

“Optimism has returned. Labor markets are healthier … Consumer sentiment is very strong, as are small business optimism measures,” he said.

Other positive economic signs include:

  • Steady and solid consumption growth;
  • Household debt burn has improved while the servicing costs of the debt have been held down by very low interest rates;
  • Housing prices rose, the stock market improved, business savings are strong and monetary policy remains expansionary.

But Beckenstein is cautious about the long range economic picture for the America economy. He noted that the policy choices made to deal with the variability of economic growth “driven by bubbles and shocks since the 1990s … were implemented to avoid total collapse of the system. In 2015, we bear the burden of facing difficult exit strategies. The emergency policies that have been in place since 2007-08 are no longer short-term triage policies.”

Beckenstein said those policy choices “are games we play to smooth the economic landscape. When the policies for the short term are not healthy for the long term and they persist a long time, the super game takes over. We are engaged in a fiscal deficit spending super game and a monetary policy super game.”

That has led to goods and financial markets not focusing on the “main drivers of the basic economic game — growth, low inflation and full-employment.”

“We’re too focused on short-term policies,” Beckenstein said. “We ought to focus on productivity … We need to find that path out. We’ve got to make some tough, long-range decisions.

Beckenstein said the politics of the desperately needed changes are challenging.

“We need some new ideas and courage,” he said.

About the University of Virginia Darden School of Business

The University of Virginia Darden School of Business delivers the world’s best business education experience to prepare entrepreneurial, global and responsible leaders through its MBA, Ph.D., MSBA and Executive Education programs. Darden’s top-ranked faculty is renowned for teaching excellence and advances practical business knowledge through research. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.


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