Originally posted by: charrison
What parts of the economy are on shakey foundations. OVerall the economy seems pretty healthy. There are of course parts of the economy where things could be better, but that is always the case. Alll economic indicators are never all poiinted in the positive direction all the time.
I could type on this for hours, but I won't. I'll just hit some of the big highlights.
Housing
There was a housing boom due in part to interest rates that were at 40 year lows. No boom lasts forever, and interest rates have risen 13 times (and these increases are just now affecting mortgage interest rates). This debate could go on forever whether there will or won't be a burst bubble. I won't go there. But if you watch the housing numbers, they are very unstable. Record increases in data one month, followed by record decreases in that same data the next month. Record increase in new home sales from from Sept to Oct was completely erased with
massive decrease from Oct to Nov. These wild fluctuations are NOT a stable foundation.
Its hard to be optimistic with a 19-year high inventory of unsold homes. Rising mortgage rates combined with the interest only loans that will start kicking in interest in 2006 (they started in popularity in 2001 with 5 years interest free) will take a huge bite out of the consumer's fun money.
For example, last year, 7% of the money that consumers spent was from taking money out of their house with a home equity loan or second mortgage. Basically, they used up this one time source of cash. It isn't available any more. And with raising interest rates, watch that 7% go away. Since consumers are about 1/3rd of the GDP, that added ~2% to the GDP growth last year. Watch that 7% shrink towards 0% in 2006, taking a 2% hit to GDP growth by the end of 2006. Falling housing prices are now occuring in some local areas, that'll kill the flipping businesses and further prevent equity spending.
Savings rate
Americans had a negative savings rate for ~6 months in a row.
This trend CANNOT continue forever. When they start reeling in spending, expect a small GDP hit (my guess is in early 2006, but I could be way off there).
Federal deficits will eventually be reeled in
This recent trend cannot continue forever. When the government does finally cut back on spending and/or raises taxes, expect a hit to GDP. A government can spend a country out of recession. But that comes at a cost of lowered growth in the future as the debt is paid. I believe congress is now going to show some fiscal restraint (and the restraint will grow in late 2006 - 2007). So expect a small GDP hit during that time.
Rising inflation
2003 inflation (Dec 2002-Dec 2003): 1.9%
2004 inflation (Dec 2003-Dec 2004): 3.3%
2005 inflation (Nov 2004-Nov 2005): 3.5% Dec numbers aren't out yet, so this isn't an official number.
I don't know if the rising inflation will continue. 3.5% isn't bad. But if the trend continues, that'll could be an economic hit in 2007. Oil prices show no sign of dropping, so I certainly don't see inflation dropping. Lets hope it stays at 3.5% and doesn't rise further.
GDP
GDP has been a bright spot. Don't get me wrong, it is good now. Let me repeat, it is good now. But, it is off its recent highs as well. The most recent high was 7.2% GDP growth in a quarter in late 2003. GDP growth for all of 2004 was 4.2%. There wasn't a single quarter of 2005 that was at 4.2%, all were lower. Due to the unusual auto sales, GDP growth for 4th quarter 2005 is likely to be near 3.3% (a good number, but tied for the lowest since 1st quarter 2003). That'll put the whole 2005 year at 3.6% GDP growth. Hopefully, it'll stay there since 3.6% is good. But there is a short trend of dropping GDP growth, and the signs I posted above all point towards further GDP hits in the next 2 years.
Employment
The unemployment rate has been a real bright spot. However, there seems to be a generational shift going on. In the 90s and early 2000s, there were a ton of dual earner families. This trend is easing. I personally feel that is good for society - we need our kids raised by a parent, not daycare. Masked in the unemployment rate is a ton of people who are just simply out of the job market. Other countries count these people as unemployeed, we ignore them. Again, socially, this is probably a good thing. However, as it occurs, there will be less taxable income and the federal governement will struggle in the next 5 years to cope. That will mean less spending (which hurts GDP) and/or tax adjustments.
Ammunition gone
The government has three big anti-recession weapons: lowered taxes, increased spending, and lowered interest rates. I think that ammunition has been spent. I do not see any significant tax decreases any time soon, that ammo is gone. Sure we will continue to reap the benefits of the recent tax cuts. But, if the economy does sour, we won't have that card up our sleeves any more. Increased spending is available. However, I think congress will finally reel it in. The political pressure is too great to use this ammo to fight a recession. Interest rates can be lowered back to the 40 year lows. But it won't happen with the current inflation rate trend.
Basically, we have to sit and wait if a recession comes. The government cannot be proactive and fight it off. That is why we as people should be pessimistic and be prepared to fight it ourselves. You have given me no reason yet why we should be unprepared.
Overall
I predict stable inflation at around 3.5%, maybe a tad higher. I expect GDP to drop to 0%-1% growth by mid-2007. That is not a recession, but it is below population growth so, if you use per capita GDP it is negative. Unemployment rates will stay low, in the mid 5% range by 2007. However, that'll be including the generational shift. Government deficits will be difficult to stop. We might actually see small tax increases in 2007 or 2008. Hopefully, we can prevent that from happening. These are all my personal estimates. We, as consumers can make things better than my estimates. But, that'll require us to be realistic about the potential that the current good economy may not stay so rosy.
We need to get the savings rate back to zero at least. Yes, that'll be a GDP hit, but it has to happen. The sooner, the better. We need to stop expecting housing in California to grow at 10%+ per year and stop getting interest only loans that we cannot afford. We need to be very careful with credit card debt. It looks like the new bankruptcy law might not work as intended (it is uncertain yet). But still, we need to keep that under control as consumers so that the government doesn't have to bail us out. We need to pressure congress to get pork out of the budget. We need to let congress cut spending in non-critical areas. We need to plan for the potential of tax raises in the next few years. We need to build a little safety net (savings) so we can weather any upcoming recession. Etc. But in order to do these things, we have to be realistic about the current economy and the potential for future problems.
Unfounded gloom is probably more dangerous.
Low confidence numbers are dangerous, that is true. You can wish yourself into a recession/depression. But we are far, far from that point. Current confidence numbers did take a dive from their highs in the late 90s, but they are still positive. Thus, this isn't a worry at this point. Unfounded optimism is more of a potential problem currently.
I would disagree as a pessimist will always see the worst in things, even when they are good...I would disagree on this too. An optimist will realize that when things dont go as hoped, they are also realize that things could have gone worse.
Some things we will just have to disagree on. I personally am a pessimist and I'm always pleasantly surprised and usually quite happy. My optimist friends are always grumpy that things aren't doing what they should.