Munroe: Making a case for optimism

0 Comments | Oakland Tribune, Jun 19, 2009 | by Tapan Munroe

These are not the best of times. The economy has been in a recession for the past 18 months. We have endured a housing meltdown and a nerve shattering global financial market bust. There is much doom and gloom in the media and in the highly partisan political scene. Despite all the hand wringing and chest beating, there is a case for optimism and there is hope for our economic future.

The stock market is a good place to start. In the past ninety days or so the Dow Jones industrial average has rebounded by 34 percent and the market is in positive growth territory in 2009. Why? Governments around the world have been pumping money into the economy at a furious pace and the money is ending up in the financial markets. Not surprisingly the flow of money is pushing up stock prices, commodity prices, and even enhancing personal wealth in the United States and abroad.

The U.S. government has earmarked nearly $11 trillion as direct and indirect economic stimulus in the past two years and more than $2 trillion of that has already found its way into the economy via government grants, Federal Reserve lending and tax cuts. Other countries including China, Russia, Britain and Japan have followed suit in pumping hundreds of billions in stimulus money into their economies.

Undoubtedly the globally orchestrated fiscal stimulus of 2008- 2009 is the mother of all stimulus plans ever conceived.

The buoyancy in the equity markets is not just triggered by the flow of trillions in cash into the economy, but also by the expectation of investors that the recession is coming to an end and now is the time to invest for making handsome gains in the future.

The sentiments of investors may not be far off the mark if we look at the two premier U.S. consensus forecasts.

The Wall Street Journal survey of 54 professional forecasters, mostly from financial institutions, and the National Association for Business Economics survey of 47 economists, are in close agreement about the economic recovery starting in the second half of the year.

There is a case for optimism if we examine the recent developments in the housing the sector. It is abundantly clear to me that a recovery in the housing industry is critical to a broader economic recovery.

The good news is that housing activity is stabilizing. Demand for existing homes has bottomed out after a three-year slide and sales of existing homes rose by 2.9 percent in April, according to the National Association of Realtors. Nearly half of the sales involved foreclosed properties.

The good news about distressed sales is that they are reducing the housing inventory and that ultimately will increase the sales of new homes as well as sales of existing non-distressed homes.

These are fairly good times for first-time homebuyers in light of record home affordability because of falling mortgage rates, low home prices, and the $8,000 tax credit for them.

Nearly 40 percent of the home sales in April involved first-time homebuyers, according to the NAR. New buyers, of course, face the challenge of enhanced due diligence on new loans as well as tight credit. If the banks had instituted half the level of due diligence currently in place a few years ago, we probably would have avoided the housing fiasco.

Recovery in the housing industry is likely to follow a sequence where rising sales will enhance new home construction, and ultimately battered home prices will begin to rise. We are at least a year away from such a scenario.

Continued job losses remain a major concern in the economy. In May the economy lost 345,000 jobs.

The good news was that this was lower than losses in April and considerably lower than in months previous to that.

Job losses will continue to be a problem until 2010 as employers sit tight even in an improving economy just to confirm that the rise in sales was sustainable.

Businesses in a period of economic recovery tend to hold back on hiring so that they can squeeze out as much productivity from the workforce as possible before they start hiring again. Higher productivity means higher profits and profits and productivity are the engines of economic growth.

The job market will remain bumpy and uncertain until 2010.

The sectors of the economy that will continue to create jobs in the next several years include health care, education and the federal government.

The $787 billion federal economic stimulus package will create a significant number of infrastructure jobs that include construction of roads, bridges. Most of that will not kick in before 2010.

Economist, Tapan Munroe, is an affiliate of the world wide consulting firm LECG, LLC. The opinions expressed in this column are that of the author. . He may be reached at tapan@tapanmunroe.com. His columns are archived in www.tapanmunroe.com. His latest book- What Makes Silicon Valley Tick?-offers an account of Silicon Valley's enduring vitality. Anyone interested in understanding this vital region that continues to invent the future should read the book. It is available at Amazon.com.