Wednesday, April 9, 2008

WEEK OF MARCH 24, 2008—Scare Tactics

Much economic doom and gloom is in the news lately, but how much of it is real and not an attempt to make headlines? We can be sure the economy has slowed, but growth has not yet contracted for 1 quarter—when it has to contract at least 2 quarters (6 months) to be called a recession. And even then we won’t know until months after the fact.

There is no question that consumer spending has slowed and consumers are more anxious. But the Univ. of Michigan’s latest consumer sentiment survey showed current conditions improved, while its expectations index of future business conditions fell. Consumers’ main anxiety seems to be inflation, which consumers expect to rise from 3.7 to 4.5 percent over the next year.

The retail Consumer Price Index was unchanged after seasonal adjustments in February, but is up more 4 percent this year. Yet consumers are spending less, so the Fed is not as worried about inflation down the road.

Many ask me if the Fed’s actions will be enough to bring economic activity and real estate back this year. My answer is that Bernanke is the best qualified Fed Chairman we have had in many a year, Dr. Greenspan included. This is because Bernanke has extensively studied the Japanese deflation of the 1990s that took Japan more than 10 years to cure.

Japan’s problem was that it did not reinflate the economy fast enough after its twin stock market and real estate bubbles burst in 1990-91, causing the massive devaluation of stocks and real estate. That, and keeping too many bad loans on their books crowded out lending on good investments. Bernanke, on the other hand, has opened the Fed’s monetary printing presses wide to prevent asset prices from falling further, and insisted that bad loans be written off sooner rather than later.

In fact, Q1 may already be the bottom. Existing home sales actually rose 3 percent in February, in part because the national median single-family home price fell another 8 percent. And February new residential construction rose 4 percent in the south and 5.1 percent in western states. This is because of a 14.5 percent surge in apartment construction, which is now up 23 percent in one year.

And so some parts of the economy are still chugging along. Automobile sales are predicted to be in the 15.5 million unit range, hardly recessionary when 17 million units was tops.

An actual decline in consumer spending has not yet happened, in other words, and it is unlikely to do so with so much fiscal stimulus in the pipeline. This is in addition to the tax rebate checks coming out in May. We also have the Fed opening its loan window for banks and brokerages who haven’t been able to sell the mortgages and mortgage backed securities (MBS) on their books. They can now trade them for Treasury Bonds to use as collateral in order to originate new loans.

Then we have further rate decreases that have brought ARM indexes below 4 percent, and so most ARM rates somewhere below 7 percent, depending on their margins. A Prime Rate that have dropped to 5.25 percent will also help those with car loans and home equity lines.

So I believe that though we may bump along the bottom in Q1, the rest of the year may already see us in a recovery mode.

Copyright © 2008

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