The continued flow of improving economic reports is making analysts more optimistic about the outlook and more confident that the recovery is sustainable.
"We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold," Federal Reserve Chairman Ben Bernanke told a Congressional committee last month – enough evidence to produce more upbeat statements, such as this, but not enough to reverse the Fed’s decision to purchase an additional $600 billion in government bonds to boost the speed and strength of the recovery.
Good Vibrations
While the Fed’s “quantitative easing” policy is not universally supported, Bernanke’s belief that the economy is improving is widely shared, and supported by a growing body of economic data.
- The Institute for Supply Management’s (ISM’s) factory index increased in January at its fastest pace since May of 2004; the ISM’s gauges of production and export activity also improved. “Businesses have figured out the economic recovery has legs so they’re growing more confident about expanding production and new orders and increasing hiring,” John Silva, chief economist at Wells Fargo Securities, told Bloomberg News. Jeffrey Immelt, chief executive officer of General Electric Co., agreed, telling the on-line news service, “The economy can get a little bit stronger every day.”
- The Fed’s Beige Book report for the fourth quarter found the economies growing “modestly to moderately” in six Fed regions and “improving” in four others. The Fed’s survey of senior loan officers, meanwhile, reported increasing demand for business loans, but reduced demand for residential mortgages.
- The index of U.S. leading economic indicators increased more than expected in December – the sixth consecutive positive reading for this barometer.
- Retail sales for December and January also increased, cementing the largest annual gain in more than a decade last year and (for January) overcoming concerns that snow storms would take a huge bite out of potential sales. . “The expansion should no longer be described as fragile,” according to Dean Maki, chief U.S. economist at Barclays Capital, who told Bloomberg that the retail sales gain “is an important signal that consumers are more comfortable spending than they have been.”
- Consumer confidence seems to be increasing, although the major polls are again producing conflicting signals. The Thomson Reuters/University of Michigan preliminary confidence index declined in January, losing the ground it had gained since November, but the future expectations component rose to its highest level since June of last year. Emphasizing the positive, the Conference Board’s consumer confidence index for January rose to its lowest level in eight months, largely reflecting a more positive view of employment prospects. The gauge of current conditions increased by almost six points (from 24.9 to 31) and the gauge of expectations for the next six months rose even more, from 72.3 to 80.3.
- Despite some continuing us and downs, the employment market is improving. Although employers added only 36,000 jobs in January – considerably less than forecast ¾ the unemployment rate fell to 9 percent from 9.4 percent, which was also unexpected. Analysts attributed the anemic job creation total largely to bad weather, which forced many businesses to close during the week the Labor Department conducted its survey, and to reduced payrolls in construction and transportation; factory employment, by contrast, recorded the largest increase since August 1998. In another encouraging sign, the percentage of long-term unemployed – jobless for 27 weeks or more ¾ declined from 44.3 percent to 43.8 percent.
- Also pointing to an improving employment picture, recent surveys have found chief executives to be increasingly confident about the economy and increasingly comfortable about expanding their payrolls. A Pricewaterhouse Coopers survey published at the World Economic Forum in Davos found that nearly half of the executives responding were “very confident” that their revenues would increase in the next 12 months. More than 40 percent of the respondents to a National Association for Business Economics survey said they plan to increase hiring in the next six months, up from 39 percent in October; the percentage planning to reduce their work force fell to 7 percent.
Confidence Rising
Even before the (more-or-less) positive employment report, economists were sounding increasingly optimistic. Nine of 10 economists surveyed by USA Today said they were more confident about the outlook than they were 3 years ago. Their consensus forecast anticipates an annual growth rate averaging 3.2 percent to 3.4 percent every quarter this year, up from 2.5 percent to 3.3 percent in an October survey.
“This growth is now becoming self-reinforcing,” Mark Zandi, chief economist of Moody’s Analytics, told USA Today. “We’re off and running.”
Some segments of the economy are running faster than others, however, and some – housing notably among them ¾ aren’t running at all. While other economists have been boosting their growth estimates, the National Association of Realtors (NAR) has scaled back its forecast, predicting that existing home sales will increase by about 8 percent this year, not the 10.7 percent gain the trade group predicted in September.
Sales of existing and new homes both beat more conservative forecasts in December, increasing by 12 percent and 17.5 percent, respectively – a 7-month high for existing home sales and the largest percentage jump for new homes since 1992. The NAR’s pending sales index also increased, suggesting that the positive sales trend has some momentum.
But even with the better than predicted December performance, existing sales last year were at the lowest level since 1997 and you have to go back to 1963 to match the skimpy new home sales total (321,000 units).
Housing Double Dip?
Home prices also continued their downward trek into the fourth quarter of last year. The closely watched Standard & Poor’s/Case-Shiller index for November declined by 1.6 percent year-over-year indicating to some economists the “double-dip” in housing that many had feared. A Morgan Stanley research report predicts that values may decline as much as 11 percent in the first quarter of this year.
Other, less pessimistic analysts think prices have reached a heretofore elusive bottom. The November Case-Shiller index was only 0.5 percent below the October level, a smaller dip than anticipated, Karl Case, a co-founder of the index, noted. “Prices have gone flat, bouncing around what I think is essentially a bottom,” he told Bloomberg News. “There are bargains out there,” he added, and affordable prices, combined with still attractive interest rates will bring hesitant first-time buyers into the market, Case predicts, “if job are created at a pretty good clip.”
Although foreclosures continue to exert a destabilizing force on the market, increasing housing inventories and depressing prices, mortgage delinquencies have begun to decline. Loans 30 days or more past due are now 11 percent below their peak in early 2009 according to the Mortgage Bankers Association. TransUnion is predicting that the percentage of loans 60 days or more past due will decline by nearly 20 percent by the end of this year – to less than 5 percent of loans outstanding, compared with 6.21 percent at the end of 2010.
But even if the foreclosure flood recedes, as many analysts are predicting, it will still take time to reduce the inventory of unsold homes and to repair the damage inflicted by what has been a severe and prolonged housing downturn. Some analysts say it may take five years or more for prices to stabilize.
A recent survey conducted jointly by Trulia.com and Realty Trac suggests that consumers are adjusting their expectations accordingly. Of the more than 2000 people responding to this November poll, 27 percent said they don’t expect housing to recover until next year, and 46 percent said it will be 2014 or later before health is restored.
“More and more, American homeowners, sellers and buyers are tamping down their expectations for a swift recovery in the housing market,” Pete Flint, chief executive of Trulia.com, told Market Watch. “[They’re] bracing themselves for a long, slow climb back to a healthy real-estate market.”
