There are definitely some good reasons to be wary: from a European debt crises that threatens the global banking system, China's manufacturing numbers coming in lower than expected, to our own Government announcing that our economy doesn't look so good. Part of this week's correction can be written down to Wall Street finally recognising that the last year of gains were based on false hopes and the Fed pouring vast amounts of cash into the markets. It is also profit taking as investors flee to the safety of bonds.
The real money, some $2 trillion or so, is resting on the sidelines waiting for our Government to figure out what taxes are going to be, what health care costs are going to be, and what the regulatory environment is going to be. These are significant unknowns that are preventing investment from occurring in a way that might spur job growth. Add to that a President who, in his rhetoric, seems to be going out of his way to pick a fight with business leaders and you have the perfect environment for a cautious investment climate.
The Wall Street Journal said today, "Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Schiller 20-city index." About 20% of mortgages nationally and 27% locally in the Chicago area are underwater. This is a big drag on the housing market since it is very difficult to trade up to a new home if you can't sell your existing home. Much less if you are not sure that you will have a job.
So where are the silver linings? Actually there are quite a few. All predictions point to growth but forecasts vary in their optimism. The Congressional Budget Office originally forecast a GDP increase of 2.3% in their August 2011 Economic Update, but expect that to be revised to 1.3% at least for 2011. The reason? The inability of a meaningful budget deal, the US Government's inability to deal with its debt burden, inflation (on mostly gasoline & groceries) that is battering already black and blue consumers, high unemployment, low consumer confidence...do I need to say more? But the CBO is predicting GDP to increase sharply (3.6%) in the 2013 - 2016 period with unemployment falling to 5% by 2016. Ah, those halcyon days to come!
Additionally, as mentioned above, home prices seem to be stabilising and sales are increasing. Mortgages are extremely low and with the Feds new "Twist", may go even lower. A 30-year fixed conforming in the threes????
Despite the fact that they are reporting a lack of confidence, consumers are spending. Consumer spending, 70% of GDP, is up as evidenced by the fact that credit card debt has increased 368% year on year.
The price of oil is also going down because of global oversupply. This is a very encouraging sign, for the consumer because most consumers are also commuters, 128 million of us, who will have more money in their pockets to buy other things.
Even though investment is not all it could be, business investment is increasing at double-digit rates. While it accounts for only 10% of GDP, in 2011 it accounted for two-thirds of the growth in GDP. And businesses are paying loan rates last seen in the 1960's, making investment less painful.
But the key to housing is employment and the key to new hiring is confidence in the future. For businesses to hire more people, they need to know what their costs are going to be. If you don't have a clue about your ROI, there is not going to be any I. Until President Obama and the Congress can agree on a direction for fiscal policy we will have economic stalemate. Given all of the other headwinds for the economy we are unlikely to see an improvement any time soon. Everyone is waiting on Washington, if not Brussels. Given the climate, however, it is hard to see that much will happen before the election. And worse, the election is likely to be another cliff-hanger. That means small majorities to the right or left, and more stalemate.
What we have seen in recent weeks is nothing but pain as the world's major economies try to gain a footing on their debts. Until the the unnecessary budget crisis wrought upon us by Congress & the President last summer, most economists were predicting a slow glide upward in GDP and employment. Nothing dramatic mind you, but heading in the right direction. An economy apparently on the mend is now being undone by policy makers in what will be remembered as an historic lack of leadership. Europe stumbles, America argues, China slows and Rome burns.