HRB ECONOMIC OUTLOOK FOR 2011

On January 2, 2010, Horse Racing Business discussed and analyzed the economic outlook for 2010.  The forecast was close on growth in U. S. Gross Domestic Product but was too optimistic about the unemployment rate:

“Anyone running an equine-related company can look to the future with hope, but hope is not a strategy.  Incorporate into your plans a lukewarm growth scenario (perhaps 2.5%- 3% GDP for 2010 and a year-end unemployment rate of 8%) with a high probability of occurrence.  Anything better will be a pleasant surprise, and you will still be in business.”

The error on unemployment was not accounting for the fact that a GDP growth rate in the range of 2.5%-3% would not be enough to generate the demand necessary to cause companies to hire new employees.

In 2011, the consensus among economists is that GDP will grow by 3 percent, with a bias to the upside, or to about 3.5 percent.  GDP is expected to pick up steam as 2011 progresses.  The rationale for this thinking is that there will be a huge amount of stimulus in the economy.  The Federal Reserve is pumping $2 trillion in additional bank reserves into the economy in what is referred to as QE1 and QE2, where QE = quantitative easing.   Additionally, the payroll tax for employees will be cut for one year from 6.2 percent to 4.2 percent. 

A panel of economists polled by the Wall Street Journal in December 2010 put the probability of the U. S. having a double-dip recession at 15 percent.

The line coming out of Washington that the extension of the Bush tax rates is a decrease in tax rates is incorrect.  The income tax rates will be exactly what they were for the previous decade and therefore won’t be a new source of stimulus.  Moreover, the estate tax will actually increase in 2011 because in 2010 it was zero.  Had President Obama and the Congress raised some or all of the Bush tax rates during such a slow-growth period, the economy would have faltered in 2011 and perhaps fallen into recession.

The unemployment rate in the United States is 9.8 percent.  It takes GDP growth of 3.3 percent just to keep unemployment stable.  Thus if the GDP growth rate is 3.0 percent to 3.5 percent in 2011, there will not be a marked improvement in the unemployment rate. 

One aspect of the unemployment rate is especially troubling for horse racing.  The unemployment rate for high school graduates is 10 percent (c0mpared to 5.1 percent for college graduates).  Pari-mutuel handle depends heavily on blue-collar players and this is a group that has an unemployment rate above the national average.  Blue-collar workers are hardest hit by the move of manufacturing to China and other low-cost locations.

The housing market will continue to encounter problems, as there are a huge number of unsold homes.  In some areas of the country, where the inventory of houses far exceeds the people in the market for a house, such as Florida, there are likely to be further price declines.  Approximately 22 percent of residential mortgage holders have negative equity on their homes.  However, on the plus side, the number of foreclosures is at the lowest level in 18 months. The Case-Shiller Index indicates that housing will continue to be a headwind for the economy in 2011.

Consumers will keep deleveraging in 2011.  Savings rates have been going up and this trend should persist.

While 2011 should be a better year for the U. S. economy than 2010, it won’t be a banner year.  Don’t look for a sparkling recovery in pari-mutuel wagering and in bloodstock markets.  Both are likely to improve for 2011, but racing has structural issues that must be addressed before pari-mutuel handle will grow.  In particular, the sport has much too high of a takeout and there are too many races being run.

Long-term, if allowed to continue, the monumental deficits in the U. S. will have a deleterious effect.  The country cannot have a healthy economy by incurring deficits of this magnitude and depending on the Chinese government to finance them.  Without addressing the so-called Third Rail–the big entitlement programs Social Security and Medicare—the debt cannot be significantly reduced.

A terrorist attack in the United States is always a very real threat.  Were one to occur, it would be highly likely to significantly affect the economy and the economic forecasts for 2011 would prove to be high. 

Be optimistic about 2011, but temper that optimism with a healthy dose of caution. 

Copyright © 2011 Horse Racing Business