Do you question the how strong this "economic recovery" is, or even if it is a "economic recovery". I question it everyday because the answer has significant effects on when and where I place investments and doing trading.
During my lifetime of work and investing I have been through about 5 downturns and recoveries. Some of them were weak recoveries, such as the mid 1970's, some quite strong, such as the 1982 one. But with them all one sector of business led the way out of a recession. Housing.
Downturns generally occur when interest rates get high, demand gets strong, and unemployment at a low rate. Almost always what makes a downturn start is some economic bubble bursting. That was the case in 2000 and 2008. This column is not on what causes downturns, but how do we get out of them.
The reason housing leads out of recessions is that interest rates have fallen due to recession and lack of demand and they have been lowered in an attempt to stimulate new loans. Once an existing home or new home is sold, you generally get all kinds of economic activity to customize or fix up the home. New flooring, new landscaping, new appliances, painting, and such that hires people and makes factories run to produce the goods. Essentially people who are still working begin to spend money and put other people to work. Once the existing and over-built from the past upturn housing get bought up, you get new construction started as well. This of course leads to new hires in that industry that tends to employ large numbers of people. Housing activity starts the cycle and the economy generally booms for several quarters or a few years. It is not unheard of to see 6% plus growth for several quarters at this point.
Now it is difficult for other industries to kick start a economic upturn, since only housing hires so many un-skilled and younger employees, who can begin work almost immediately and be productive. Only housing touches so many related industries and gets factories humming. In fact usually automotive sales kick in shortly after housing as people find employment buy cars enticed by low interest rates as well. Automotive sales also tend to touch many industries and get factories humming as well.
As we survey today's economic environment we frankly see little if any housing recovery. There is still plenty of housing inventory from the past upturn not sold and construction sees no need to make construction loans and begin building homes they likely can not sell. Speculative homes are just well too speculative. All this is because the last upturn produced a bubble, that unfortunately was in housing. I remember back in the mid-2000's looking a subprime lending housing stocks and trying to understand just how they made so much money and paid such handsome dividends. I asked stock analysts who could not answer the question either. But these stocks kept right on paying big dividends and stock prices going up. As we now know the whole thing was a bubble and the house of card finally collapsed in 2008, when the mortgage security business got too leveraged.
We come to the present and what is obviously an anemic economic recovery. Government has done all it can, some say more than it should, to alleviate this situation with mountains of spending. The Fed has done the same with keeping interest rates at a several generation low. Normally in this kind of economy houses would be selling and being built with accompanying economic activity noted above. Frankly I have no idea where this current economy is going, as the overbuilt housing supply is at least two years or more from being bought up. I do suspect we will need to see a 10% to 15% or more drop in house prices before the cash buyers move in and buy up the excess. I also do not see interest rates rising as noted in my last posting as The Fed is going to have a difficult time existing the scene
Despite what the current administration in Washington DC tries to tell you this recovery is tepid and not likely to get better soon. We can play games with unemployment rates and cut a billion here and billion there, but until we decide to quit trying to manipulate the economy nothing is likely to make a difference. So The Fed just keeps printing money to keep us from an depression and the government keeps spending and piling up debt that will stifle any economic recovery. Sorta caught between a rock and a hard place.
In the end if we are to continue this capitalist economy we must face the fact we can not continue to try and artifically manipulate markets in an attempt to alleviate economic pain for bad business decisions, such as the housing situation we are dealing with presently. All that does is create some artifical bubble or worse. It is time to accept the pain for past mistakes and cut government spending significantly and allow interest rates to float to whatever level demand dictates. Having a freedom based economy we must accept the up and downs associated with free enterprise. With freedom of choice comes the associated consequences and advantages of inovation and generally higher standards of living.
Or we can continue with a economy that is continually manipulated by The Fed and government spending with the accompaning higher unemployment, very little if any growth and lack of free choice, and a lower standard of living, but in return we get lots of stability. This choice is for the citizens and voters of the USA.
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