U.S. Economy Looks Ready to Bounce

By December 2006, living in New Jersey started giving me the same feeling as living in an emerging economy (of which I have first hand experience): High home prices, high interest rates, high gas prices and high property taxes were leading to low disposable incomes. Poor retail sales were resulting in many retailers barely covering their employee and rental costs.

On top of this, no new technology was either coming from US or being promoted by government. It reminded me of a bush policy at the beginning of his term where R&D budgets were to be approved only when clear goals were given and targets were being met (as if R&D results are predictable). College education had become very expensive and government was not doing much to increase number of scholarships or helping deserving students.

The war in Iraq, technically, should have helped the economy (as it increases government spending), but there were no clear signs of it doing so. Investment sentiment was favoring emerging economies due to their high growth rates and dollar was going down against emerging market currencies.

America, which to the rest of the world means affordable living costs, disposable incomes, government backed research and education programs and innovation leading to new technologies was a different place.

Observing this, in the beginning of 2007, I took some important steps. Two of these were putting my house on the block and switching my 401 K to 100% money market funds. I thank God for it !

However, more than two years later, things are looking rosy again:

• Low home prices coupled with low interest rates have increased disposable incomes of working people (more than 90 million of these)
• Lower gas prices has contributed in a similar manner
• Investments by government is creating government jobs thus helping consumer sentiment
• High savings rate in the last two years is leading to higher confidence among consumers
• Stronger dollar and conditions in emerging economies is making US look like a better investment destination.
• Government is pushing for greener technologies

Since two-thirds of US economy is composed of consumer spending, the economy should bounce back shortly, may be in less than three to four months.

Disclosure: No positions.

Comments

[jeandit75:]

Wishful thinking as the consumer's over indebtness will translate into a need to save more as oppose to spend more

May 03 07:36 AM

[Alan Chokov:]

Americans carry more than $2 trillion in consumer debt, with $937 billion tied up in credit cards, according to the Federal Reserve. If we are going to have a psychological reversal of the current economic turmoil Americans should be encouraged to tackle that debt and commit to improving their money-management habits through financial literacy. We are going through an economic correction, but should not make the same mistakes in the future, according to Alan Chokov, CEO/President of efinanceportal.com.

May 03 08:07 AM

[LilBob:]

I have to agree with jean here. I don't think the economy can "bounce back." I'm more inclined to agree with those who are saying that we'll see a return to modest growth as stimulus funds lead to new jobs and green technology ventures start to permeate the market, but I don't see any radical upward shifts in the near future. I think investors are "bubbled-out," and will be especially skeptical of claims of "hot market sectors," and "can't miss opportunities."

May 03 08:11 AM

[Carlos Lam:]

Household debt is at 100% of GDP. Consumers need to pay down debt before real growth resumes. Simply put, we can't keep buying the way we were. The day of reckoning has arrived, and we need to pay off our debt.

May 03 08:18 AM

[Dave Wrixon:]

Dream on.

May 03 09:15 AM

[noob:]

I think this is more of the same colored smoke that DC is pumping out. Creating government jobs may help consumer sentiment by thinking there is work and productivity to be had. But the reality is that rarely, if ever, does a new government job do anything but further reduce the disposable income of the consumer.

Focus on disposable income if you want to understand what is going to happen with the recovery.

If you print a trillion dollars everyone will have money, but their paychecks won't accommodate the inflation that follows and disposable income will be reduced.

If you create a trillion dollars in jobs then you take a trillion dollars in out of other peoples pockets by either inflationary spending or tax burdening the paychecks. You have reduced disposable income.

There is nothing in the US economy today that makes it look like a better investment. "Green Shoots" do not make an economy. And most of these shoots are "less bad" and not actually "good" signs of the economy.

Debt must be paid down and paid off before anyone can have a disposable income. The only alternative to generate disposable income is to reduce taxation significantly. The effects will have to be easily 5% on every paycheck and probably 10% for anyone to convert from debt reduction to consumer spending.

If you want to really get out of the depression today then you have to start massive termination of government spending and allow that to feed back into the pay check. That would have an impact in a matter of 1-2 months.

Personally, if I could get terminate my SS deductions and waive my SS futures I would be very happy. I would gladly use that for consumer spending. I think I would buy a lot of gold for now.

May 03 09:15 AM

[HChang:]

I don't agree with the author. I think we are heading for some big trouble down the road. An economy build on massive debts is not sustainable. It will burst again, just a matters of time. So i'm not sure why the market is getting so excited with a 6.1% contraction and a 8.5% uemployment. Instead of going down, the Dow went up???

May 03 09:35 AM

[dcb:]

"because the market is forward looking",
because we are in a new paradigm"
"because government debt doesn't matter"
"Because credit and leverage is good"

those are just a few of the stories I have heard. I'm sure you've listened to enough. It is always the same old story and it always involves why common sense no longer applies in this new world of ours.


On May 03 09:35 AM HChang wrote:

> I don't agree with the author. I think we are heading for some big
> trouble down the road. An economy build on massive debts is not sustainable.
> It will burst again, just a matters of time. So i'm not sure why
> the market is getting so excited with a 6.1% contraction and a 8.5%
> uemployment. Instead of going down, the Dow went up???

May 03 10:17 AM

[Misha:]

I like everything you said except two things. First, it took 30 years to create the mess you described. It will probably take longer than 12-18mos to unwind the problems. Watch the banking system for clues. When Wall Street’s political power begins to decline through legislative actions and the Wall Street compensation gets more in line with compensation of other professionals, you will know that this nation has correctly adjusted its priorities. Second, thank yourself, not god.

May 03 12:13 PM

[Rhett:]

The economy is poised to bounce ok, if you mean a bounce down. Just watch the stock market next week and housing prices for the rest of the year.

May 03 12:31 PM

[rockingandr...:]

The autor states the economy looks like it is ready to bounce. The key word is "ready" and it may be "ready" like Japans was "ready" for more than 10 years and it never bounced! I agree with some of the other responses here: more government including government jobs and so called "greenjobs" will not be the cure....

Tack on the trillions of dollars for other healthcare and gov. related programs =equals higher taxes =equals less to spend creating private sector jobs = equals high unemployement = falling dollar = equals less investment = continued ression = and continued deflation which is what we are currently experiancing.

You are dreaming if you think this economy is going to filp quickly with the current mentality leading the way...

May 03 12:44 PM

[WayneinOregon:]

Perhaps, but with the prospect trillion dollar deficits for as far as the eye can see, I'm afraid any economic bounce dependent on excessive government deficit spending is going to be relatively short lived.

May 03 01:59 PM

[UbuTranscen...:]

Sanjeev,

Congratulations on your correct investment decisions but the optimistic prediction you make for the economy does not mention the daunting negative factors that also exist.

Perhaps we will live happily ever after, but that is not the only possible outcome. It's early in the game - many tough innings to go.

As a sidenote from my years in the skydiving community: the term 'bounce' describes the rapid deceleration that occurs at the end of a skydive if your parachute does not open, as in: "Dude, he snoozed, opened late, and bounced. Got any more beer?"

Hopefully the Fed and Treasury have engineered an adequate parachute - the skydive's been a bit scary so far.

Thanks for your column, Ubu.

May 03 02:56 PM

[@TexasER:]

Recessions are suppose to be healthy, purifying experiences for the economy. We no longer have time or patience for that, it seems.

Economic models in certain industries become inefficient and eventually unsustainable. Then everyone gets thrown out on the butts (so to speak). Everyone scratches their heads we invent new viable industries.

The current problems we face are the result of whitewashing the last 3 or 4 recessions. Trying to find new ways to refinance the old broken system.

Hopefully the cycle will end here...if not the next one probably won't go so smoothly.

May 03 05:31 PM

[Dagpotter:]

Nice thoughts, but I see the economy continuing to decline for a great deal longer. You are also wrong about the Iraq war. It did stimulate the economy by creating a great deal of high paying jobs that allow those holding them to spend on consumer goods. Come to a city like Huntsville, AL a child of the defense budget and see houses costing more then most of Alabama, a lot of nice cars and big screen televisions. Per capita income is much higher then the rest of the state outside of Birmingham and Montgomery or South Tennessee.

May 03 08:09 PM

[Carlos Lam:]

On May 03 08:09 PM Dagpotter wrote:

> great deal longer. You are also wrong about the Iraq war. It did
> stimulate the economy by creating a great deal of high paying jobs
> that allow those holding them to spend on consumer goods.

The problem with the war-as-stimulus argument is that it's still central planning by any other name. Taxes get taken from productive citizens & that money is then funneled to the defense industry. War may be "stimulus" for some localities (i.e. home districts of senior congressmen) but it isn't usually a good thing for everyone. People get killed, thereby cutting short their productive lives. Material gets incinerated. Seasons pass with no crops being grown. In short, the human and material costs, coupled with the opportunity cost of things not done because of a war, are a tremendous price to pay. A people should consider carefully whether they wish to pay such a price.

P.S. This is not to mean that wars must never be fought. It's just that the historical record makes me believe that the only wars that we've fought that seem to be absolutely necessary are the American Revolution & the War of 1812. In all the others it seems that we Americans didn't necessarily have clean hands.

May 03 09:13 PM

[swalter:]

During the earlier period I also withdrew from the housing market and moved all of my assets to cash; however, this was based on the sound advice of credible analysts who provided substantial support for their positions. But you- Sanjev- typically make ridiculous pronouncements based on inappropriate indicators. Sometimes I am not sure whether you are joking.

May 04 09:18 AM

[Sanjeev Sharma:]

swalter, you were lucky to get good analysts to advice you. Most of the america did not get that accurate advice.

I can write tens of pages explaining every single factor about each of my articles and you would be bored reading it all day.

I have focused on only those factors which I have considered most relevant, and usually I have found my analysis to be correct later.

May 04 11:18 AM