Luxury Homes | Investments | Renovations    

Bookmark and Share

economic forecasts, news

What About the ‘R’ Word?

  

January 16, 2006
By Edward Leamer
UCLA Anderson Forecast
(Commentary published in the Los Angeles Business Journal)
 

 

 
 
In recessions we have negative economic growth, and in recoveries we rack up pluses. But overall, the U.S. economy since 1970 has grown an average of a little more than 3 percent a year.    

Don’t expect that for 2006.

The Wall Street Journal, in a recent survey of 56 economists, found that their forecasts for 2006 averaged around the “normal” rate of 3 percent. But that is not what the UCLA Anderson Forecast projects.

The UCLA Anderson numbers are about 0.5 points less than normal. When the Wall Street Journal ranked the forecasts top to bottom, highest to lowest, UCLA Anderson’s forecast ranks 52nd of 56.

What accounts for that difference? Part of the answer depends on our interpretation of the stronger-than normal numbers in 2005 and 2004. Here is my story of the decade: It’s been a roller coaster ride that is ending in 2006.

The discovery of the Internet set off a mad dash for the Web, and that powered the U.S. economy forward at breakneck speed from 1997 to 2000. Every business in America had to have a cool Website or advertise on one. There was a very heavy investment in equipment and software. Every person who could crawl off the street was offered a job and anyone who could whisper “yes” was given one. Equity values went into the stratosphere and dot-com workers and their friends celebrated with a wild spending spree.

Party favors

Reality and reason became unwanted guests at this party in 2001, causing equity values to plummet and jobs to disappear.

 But the party picked up again in 2002, when Alan Greenspan arrived with a very attractive bond market nestled on his arm, and passed out party favors inthe form of low-interest loans to compensate for the loss of equity wealth.

The low loan rates, reminiscent of the 1950s, set off a mad dash for homeownership that powered the U.S. economy forward at breakneck speed from 2002 to 2005. Every American family had to have a cool house or live next to one. There was heavy investment in new homes and remodeling existing ones. Every person who could crawl off the street was offered a home loan and anyone who could whisper “yes” was given one. Home values went into the stratoshpere and homeowners and their friends celebrated with a wild spending spree.

But as the party went on, Mr. Greenspan began to grow worried over the level of debt, and reality and reason returned. In 2006, regulators, worried about delinquencies and defaults, will start to require borrowers to walk off the street (crawling is not enough anymore) and the deals that were premised on continued high rates of appreciation will go sour. Homeowners who can service their debt will cling to their optimism and refuse to sell into a softening market. This tenacity will help keep homes prices from a severe adjustment, but it will make high sales rates of existing homes a thing of the past.

Manufacturing question

But without the dot-com mania or the housing bubble to power the economy forward, things will slow down considerably in 2006. It could become really ugly really fast in the housing sector if there is a recession with sever job loss, since loss of a job is often enough to force delinquency and default. History suggests this is likely, but history is not a perfect guide.

The problem sector in terms of job loss is manufacturing, which alone accounts for 60 percent of job losses. President Bush’s biggest problem in his first term was WMD: the Wicked Manufacturing Decline that occurred during and after the recession of 2001. But sometimes bad things turn out OK. Though there has been no noticeable pickup in jobs in manufacturing, it is also true there just aren’t that many more jobs to lose.

Thus the good news: The softening of the economy because of problems in housing cannot be amplified in the way that it had been historically with major job losses in manufacturing. Without that amplification, we cannot have enough job loss to have a recession.

In other words, rather than a sharp correction, 2006 begins an adjustment that is little-by-little, lasting several years instead of just one. There won’t be as much cocktail chatter about how much we are making on our homes, but like the frog in hot water, we otherwise will notice – provided that foreign lenders who have been financing a $700 billion gap between U.S. earnings and U.S. spending do not start to worry about the U.S. economy and begin to look elsewhere. That could be where the next recession gets started, though we have never had one in the U.S. that has its roots in an external deficit.


Drew de la Houssaye is an associate with THE BROKERAGE Real Estate Group Beverly Hills. Drew specializes in westside luxury real estate, renovations and probate sales. He blogs on Westside real estate, entertainment and local events. If you would like to contact him, he can be reached via twitter, facebook, LinkedIn or email.

Comments are closed.


Twitter

Contact

Drew de la Houssaye
(310) 903-7866 ph
(310) 300-0635 fx
License #01518883
Logo
Headquarters:
468 N. Canon Drive
Beverly Hills, CA 90210

Credits

Powered by WordPress
Design by Graph Paper Press
Subscribe to entries
Subscribe to comments
2024 by Drew de la Houssaye – Realtor ©