1. The economy slogs along with subpar growth.
No matter how much the Fed, President or Congress try to aid growth, GDP will not top 3.00 percent for the year. In fact, it may be closer to 2.25 percent. QE2 won't offset the loss of stimulus funding after the first quarter; housing, retail and, to a lesser extent, autos, will continue to underperform; unemployment and foreclosures will combine to hurt worker mobility and depress consumer confidence; while Corporate America will remain stingy, avoiding significant investment in plants, equipment and people.
2. Unemployment will range between 8.5 percent and 9.0 percent, most likely averaging near the higher end.
This is sort of the flip side of No. 1, wherein deep structural changes in the U.S economy and world trade will keep companies off balance. Demand-side initiatives will not create jobs. Relatively high energy prices and a weak dollar will hurt consumption. More people will try to return to the work force, having exhausted all alternatives. State and local jobs will be shed at a faster rate, partly overshadowing private-sector gains.
3. Deflation, not inflation, will guide policy.
Without wage increase, there is little chance of inflation and even if the price of some goods (food) continue to rise, there will be little if any permeation. Higher prices will depress demand. Companies will resist wage increases because of high unemployment and will soon resist price increases. Look for the core inflation rate to hover around 1.00 percent for another year.
4. Democratic shakeup.
From the White House to the Capitol, heads will roll and players will change. Look for a house-cleaning from President Obama, from chief of staff to his economic team (If things remain as bad as predicted here, Treasury Secretary Timothy Geithner will be among them). Democratic Congressional leaders Nancy Pelosi and Harry Reidwill also be challenged, with at least one of them stepping down. The President needs inspiring, innovative lieutenants to restore his image and the economy to position himself for re-election.
5. Deficit reduction goes nowhere, yielding nothing significant.
Dramatic and sweeping change is typically not something that comes in moments of weakness, especially when gridlock in Washington will resemble more of a death hug. Americans don't care that much about the deficit, if it means another hit to their already weakened pocketbooks, and both Democrats and Republicans alike will try to give the people what they want—more goodies, less taxes.
Most taxpayers will be too preoccupied with local and state budget woes to care about Uncle Sam's balance sheet. Real change will have to wait until the 2012 race, when it is a major campaign issue and becomes part of the winner's mandate.