With a new year, and a new President, many people in the U.S. are making prognostications about the future of the economy. People are asking many questions…
How long will this recession last?
Have we hit bottom yet?
Will house prices recover?
Will the stock market recover?
Is now a good time to buy?
How much higher will the unemployment rate go?
Etc, Etc, Etc. Ad infinitum.
I have been having a field day reading all the predictions that have been coming out. Some are well informed and use massive amounts of data to back them up. Many are just off the cuff and have no basis in reality at all.
As many of you know I am a “closet economist.” I love studying business, politics, economics, and how they all intersect. For a primer on my economic philosophies please read, The Complete Newbies Guide to the Economy.
For the sake of this article I will not use data to back up anything. The amount of data I have sifted through is pretty ridiculous. And I assume (maybe I am wrong), that you don’t want a pile of data.
If you are anything like me then you realize that the economy, when it comes down to it, is only based on two things: the fundamentals & speculation.
When it comes to fundamentals one thing must always hold true. The economy is only as big as the total of it’s production: both goods and services.
When it comes to speculation one thing must always hold true. Money will flow to where people think they will gain most from their investment.
You can speculate on the fundamentals and you can speculate on speculation, but in the end it is all gambling.
So when you look at the economy and it’s indicators (the stock market, house pricing, etc.), you have to remember that what you see isn’t always what you get.
The Death of Dow Jones is true. We definitely will not see the Dow rise above 10,000 this year and may not see it above that mark for the next 5-10 years.
The data still points to a lot of uncertainty in the housing market. House prices continue to drop. We are off 18.5% from the July 2006 peak. Last year house prices dropped 10.6% nationally. What is interesting is that home prices fell in only 34 states. So in 16 states home prices actually increased although by very small amounts.
Ultimately this is a very regional effect. California is off by 27%. West Virginia, Texas, and South Dakota all had 3% or more price increases!
In December of 2007 I wrote a paper for my MBA program that cited a 10-15% expected median house price drop in 2008.
The worst states will continue to drag down the median house price in 2009. There is still a lot of fear about what Option ARMs and Alt-A loans will do in the next 3 years. The subprime mess seems to be mostly over, but we have another wave coming.
Luckily, I believe low interest rates have kept a lot of people from defaulting on these Option ARM loans. As long as they stay low for the next three years we may see some market stabilization.
The only trump card is unemployment. (Fact: Unemployment is always a trump card). If unemployment continues at it’s current pace then nothing short of a miracle will stem the continued fall in housing prices.
Without a huge analysis by geographical area or industry type I will say that unemployment will cause at least an additional 5% drop in median house prices.
With that being said, I think my prediction for 2009 is the same as 2008. We will see another 10% drop in housing prices off the 2006 peak.
Back to the stock market and unemployment…
We are seeing these layoffs because of the drop in the stock markets and the loss of capital that goes with it. To make their stocks look pretty again many companies are laying off thousands of employees to make the bottom line look more profitable.
In my opinion this is almost idiotic. Many of these companies do not need to layoff employees. There balance sheets are strong enough to retain many of their employees even in this downturn. Yet many, as we know, are in a struggle for their very life. Laying off people is their one chance for survival.
Like I have said before, the money is there, it’s just gone into hiding. Fear is what is causing it. Greed will once again emerge and bring it’s head into the light. As of right now, he is resting and waiting for the next opportunity.
One theory I have been harboring is the idea of market equilibrium. Although some people want to argue against it, many people believe there is a fundamental equilibrium that is often hidden within the speculation on the markets.
I take it one step further and say that the total amount of “production” in the world is steady and can not be changed. This is based on the number of people on the earth, how effectively they use resources, and how much they produce.
Population is going up so the world economy as a whole will continue to grow.
Resources are both going up and coming down. More people equals more resources. More ways to produce renewable energy produces more resources. More technology or productivity techniques equal more resources. What we are losing are our “unrenewable” resources such as coal, oil, and natural gas. Forests are harvested and the seas can be depleted of fish faster than they can reproduce, but they are still renewable resources.
With increased education and disbursement of technology people will continue to find ways to be more productive.
When you look at things that way you realize that we are still on a worldwide trend upward. Yet, even with the vast interconnectedness of the world, economics are still localized.
The U.S. looks to remain productive and therefore growing in the years to come. Even though the Baby Boomers are supposed to be retiring in mass and sucking off government programs that our tax base can’t support, I am starting to believe that this may not be such a big deal.
Immigrants will help replace Baby Boomers as they retire. They will also demand many goods and services that will help support the economy as well. Immigration is high and will continue to remain high as long as our borders remain open. Immigrants tend to have large families and will help replace many of the older generation. Birth rates still look like they will remain high as well. We still maintain the highest population growth of just about any industrialized nation.
With that being said, I think we will see a job recovery faster than we see a stock recovery. (This is contrary to most economists views. They believe investment must flow back into stocks before companies will start hiring in mass again.) Although 2009 will still be a bleak year.
You can expect unemployment to rise above 10% in 2009. We will see a short term recovery in the 4th quarter of 2009 and the first quarter of 2010, with unemployment stabilizing at 7-9% in 2010.
2009 will be an interesting year. I think things will appear to be stabilizing when in fact we will be preparing for another huge market correction near the end of the year that will last into 2010. My hope for any recovery is in 2011. Get ready for an interesting election year in 2012 where retirement plans, social security, and health care will be addressed.
Here is to another wonderful year of great media stories! 😉