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2010 : Don't Hold Your Breath
What is your economic forecast for 2010?
Are there specific economic markers that you find particularly useful and upon which you rely when making your predictions of your sales and purchases?
From my perspective, the United States economy has, for the last decade, serial bubbled its way to the illusion of wealth. First the internet bubble (2000) and then the cheap credit for financing a house bubble (2007) and finally the Stock Market (9/2008) have lined the American consumers pocket with a seemingly endless growth in wealth. Now, without the benefit of another quickly inflating asset, it would seem that we’re facing a long-term retrenchment of the consumer as he begins to realize that the last ten years of “wealth creation” may have been quite illusory. To make matters worse, declining consumer demand and tightened credit markets have pushed unemployment rates to new all-time highs, further burdening the consumer and our recovery. To me, any real sustainable turnaround in our economy will have to be lead by sustainable growth out of demand from the American consumer for this to tangibly affect the “real economy” (2/3 of US economy is from American consumers)- that being the provision of tangible goods in the United States as opposed to our tail-wagging-the-dog reliance of financial services as an engine for growth. In the above graph, we see a decided inverse relationship between the U.S. Manufacturing Capacity Utilization versus the Unemployment Rate. Now, this may be a little bit of the chicken or the egg theory, but it’s clear to me that the linchpin of any sustainable economic rebound will be in real production through manufacturing. We at MAS, truly believe that home prices in the US at the entry-level market rate will not change much in 2010.
I believe most markets in the country have bottomed-out. We will see slight appreciation in some cities where inventory is limited and demand is strong, but no double-digits. The world economy has recovered much more quickly than here in the USA and, with record level deficits and nearly 0% interest rates, we should see the dollar continue to weaken through the year making US goods highly competitive on the world market. This trend allows the USA to pull out of this funk. However, a weak dollar is not in the best interests to the rest of world, and could eventually set the stage for strong inflationary pressures in 2011. Therefore, the Fed is likely to issue a token rate increase (1/2 point or so) toward the end of 2010. I have been reading and watching the situation in the EU due to the fact that Portugal, Spain, Greece and Italy are having big problems (deficits). We can’t forget that England is not too far from them. Therefore, dismantling the EU is more possible than ever before. On the other hand, China is now the largest consumer of commodities in the world, and their sheer size and thus demand are keeping the prices for metals and oil as much as 10% higher than necessary. Can China keep up this pace of growth without triggering inflation or a currency revolution? When will that bubble burst? How real and truthful are their statistics? This remains to be seen. We think that investment in India and Brazil would be safe. In addition Russia may be added to the three we already mentioned. If you prefer not to invest your money in stocks/park it in the bank or bonds Gold is a good commodity and we believe it will reach $1400.00 an ounce by the end of the year.
Still, there is some good news! Everyone seems to agree that the economy will grow in 1Q 2010, maybe as much as 4% – 5%. Some of that will have been stimulus related (Cash for Clunkers, etc.) but some if it will have been building inventory. This is a very positive sign and 3 out of the 4 of the economic forecast seminars I have attended, have predicted the continuation of that trend through the second half of 2010. Particularly strong sectors are healthcare (despite the reform bill) and exports. With another $500B of stimulus dollars still to be spent, the economy should have a bit of a tail wind for two quarters or so. The 4 different economists (Diane Swonk, and David Hale) and prognosticators (Bob Froehlich, and Andy Busch) described what they foresee for the USA and world economics for the coming year. I am not an economist, however, I attend seminars that are about the economy and real estate therefore, what I’ve written here is my interpretation of what they predicted, along with my staff doing our research for the upcoming year and decades.
I am very optimistic for the coming year and happy that in a few days, 2009 will be behind us.
Published: December 26, 2009 in Los Angeles California @MAS’s News Letter