Peripheral vision

Peripheral vision Potential surprises on the horizon for 2011?

Walter Kemmsies chief economist, Moffatt & Nichol

   Last month’s column laid out a base case outlook for 2011, so this month the focus is placed on various key factors that are unlikely to happen but for the sake of full disclosure should not be totally discounted.
   As such, it is not that these items are expected to occur, but by the same token they are not completely improbable. It is recommended that anyone who has to make decisions where the outcome is affected by future business conditions compiles their own list. Peripheral vision can be a lifesaver.
   Among other things, the effect of massive stimulus spending and the world’s second-largest economy, China, keeping its currency undervalued while the U.S. trade deficit mushrooms, is a recipe for instability.
   With that backdrop in mind, here is the list, with scenarios subjectively ranked from least unlikely to the most unlikely.
   Scenario No. 1: U.S. economic growth begins the year at a higher than anticipated rate so that 2011 growth exceeds 2010. The recovery finds strength from a stronger than expected recovery in the real estate and banking sectors, as well as exports.
   Scenario No. 2: U.S. dollar appreciates strongly in 2011 but exports still grow strongly. The reason for the appreciation could be the ‘least-worst’ principle. With the United States still limping through a recovery, Europe struggling with a massive public debt burden, aging Japan struggling against deflation and China trying to avoid a surge in inflation, the ‘least-worst’ currency could be the U.S. dollar.
   Scenario No. 3: Oil prices rise 25 percent in 2011, due to accelerating economic growth and declining inventories. The real surprise would be that despite the higher fuel costs, the economic and trade growth is so strong that, ocean carriers abandon slow steaming due to equipment shortages.
   Scenario No. 4: Inflation rises from the less than 2 percent rate in 2010 to the 7 percent to 9 percent range. The Federal Reserve starts increasing interest rates very quickly and the 10-year yield rises to the 7 percent to 9 percent level.
   Scenario No. 5: Ocean carrier rates increase significantly despite concerns about new ship deliveries increasing container carrying capacity faster than container volume growth.
   Scenario No. 6: Many U.S. states increase road weight limits, lowering the cost of draying heavy U.S. exports. Consequently exports grow faster than imports, even if the U.S. dollar strengthens. Container volumes in 2011, which are expected to exceed the peak 2007 levels, instead of being led by growing import volumes, are instead led by exports.
   Scenario No. 7: Trucking companies manage to hire enough drivers, purchase trucks and their volumes grow faster than rail volumes.
   Scenario No. 8: Many states pass legislation that not only allows public/private partnerships but also creates infrastructure banks, leading to a surge in transportation infrastructure privatizations.
   Scenario No. 9: China’s policymakers shift from developing an export-oriented economy to a consumer-driven one by pushing for wage increases and decreasing intervention in the foreign exchange markets to keep the yuan undervalued. This could be accompanied by a Chinese private equity group or pension fund purchasing a U.S. company with a global brand name to jumpstart the process of creating a consumer culture.
   Scenario No. 10: A terminal operator issues shares in an initial public offering instead of selling itself to a private equity group, pension fund or insurance company. This is followed by a flood of highway privatizations via IPOs. Before the end of the year there is a lot of discussion about possible launches of various exchange traded funds based on various types of privatized infrastructure such as highways, bridges, ports and other terminals.
   The most likely event from this list of surprises is a rise in inflation and interest rates due to increases in commodity prices driven by a rebound in consumer spending. While the surprisingly strong underlying economic growth would be well received, the consequences of rising construction materials costs and the cost of borrowing would delay the much-needed improvement in U.S. transportation infrastructure.
   Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or e-mail, wkemmsies@moffattnichol.com.