Legendary investor Warren Buffett said in an interview aunemployment could hit 11 percent and a second stimulus package might be needed as the economy struggles to recover from recession.
Buffett, the billionaire founder of Berkshire Hathaway, said Americans suffered "a shock to the system" from the economic difficulties in the final quarter of last year but had started to rebound.
"We're not in a freefall, but we're not in a recovery either," he told ABC's "Good Morning America." "We were in a freefall really in the last quarter of last year, starting in the financial markets and spreading to the economy, and we had this huge change in behavior."
Buffett, a supporter of President Barack Obama during last year's election campaign, said a second economic stimulus package might be needed. The Obama administration says it does not see a need for a second stimulus yet. "I think a second one may well be called for. It is not a panacea. A stimulus is the right thing. You hope it doesn't get watered down," he said. He likened the first $787 billion stimulus package passed by Congress to "half a tablet of Viagra and then having also a bunch of candy mixed in --- it doesn't have really quite the wallop."
Buffett said unemployment had "a ways to go" and he would not be surprised to see it hit 11 percent before it recovers. "I'm not predicting it but no that would not surprise me," he said of the 11 percent figure. "We're going to come out of this better than ever, the best days of America lie ahead but not next week or next month," he said.
Investors have basked for months in a powerful stock and corporate credit market rally, but the glow may fade as unprecedented measures to kick-start flagging economies mean near-zero inflation and benchmark interest rates won't last forever. A surge in bond yields in the United States and elsewhere portends a sustained period of higher interest rates, boosting the cost of capital for corporate and consumer America. Rising U.S. Treasury yields, with the yield on the 10-year note this week nearing 4.0 percent, have driven mortgage rates back up. That has threatened to kill a refinancing boom that has helped preserve the still-fragile health of recession-weary households and the banks that lend to them, at a time when credit losses show no sign of leveling off and the nation's unemployment rate races toward double-digits. The rise in bond yields and mortgage rates may also act to check the huge recent rally in global stock markets of the past three months, with the Federal Reserve trying to end an 18-month recession and yet not spur inflation.
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Green shoots or false dawn? - The U.S. economy appears destined for several years of weak growth and high unemployment that leave it vulnerable to a recession relapse after the massive dose of government stimulus wears off. While tepid growth looks likely to resume late this year and build modestly into 2010, the credit bust has left households and businesses unable or unwilling to borrow and spend as freely as they did before the crisis. The U.S. government has stepped in as lender and spender of last resort, but its deep pockets are not bottomless. Waning political and investor appetite for taking on more debt could stand in the way of any additional big spending plans.
"When you remove the government stimulus, what the private sector can generate in terms of growth feels like a recession," said Jeffrey Rosenberg, head of global credit strategy at Banc of America Securities Merrill Lynch in New York. Rosenberg thinks the U.S. economy may trudge along at a sluggish growth rate somewhere in the range of 0.5 percent to 1.5 percent while banks recover from the credit crisis, which could take another three years.
"If that's what you're able to generate, that economy is not generating the job growth required to bring the unemployment rate down," Rosenberg said. This is a much darker outlook than the one put forward by President Barack Obama's administration in its latest budget projections, which show economic growth bouncing back to 3.2 percent next year and hitting 4.6 percent by 2012. It also calls into question the staying power of a recent stock market rally. The Standard & Poor's 500 is up more than 30 percent from an early March low. The gloomier scenario assumes that banks take years to recover from losses that some economists think could reach $4 trillion; consumers curb borrowing and spending as they repair the $11.2 trillion hole blown through their savings last year; and the explosion in government debt drives up interest rates.
Now you are wondering 'Where is the connection to Baja Business?" - Well, the saying is: "If the the US has a cold Mexico suffers a pneumonia" - the reality is that since fall 2008 the US has already a pneumonia!!!
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Mexico's economy shrank by 8.2% in the first three months of this year compared with a year earlier, as the global downturn hit demand for exports. The country's finance minister has warned that economic output could decline by 5.5% in 2009. Mexico has been hit by the US recession and a drop in the amount of money sent home by migrant workers. Analysts predict the Mexican economy could suffer its biggest contraction this year since 1995.
The latest figures do not reflect the impact of swine flu, which broke out after the quarter had ended. The Mexican finance ministry has warned that the flu could cost the country's economy more than $2bn (£1.3bn). "We are looking at a lost year," said emerging markets strategist Win Thin at BBH. Capital Economics echoed this view saying the latest data "confirms our view that the economy is currently facing the worst recession in its modern history". "This sharp fall leads us to believe that our initial GDP forecast of a 5% contraction this year was not pessimistic enough." Capital Economics has now downgraded its forecast to an 8% contraction. Mexico sends 80% of its exports to the US, so has been particularly exposed to the fall in consumer spending there.