Economy Still Has a Big Wall to Climb

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by: Tom Lindmark

It’s spring and as they say, that’s when hope springs eternal. That certainly seems to describe the current spate of commentary with regard to the economy.

No longer are the Democrats in trouble and they may in fact be catching a bit of a tail wind from the economy, or so goes the political analysis. The economic types are even using the V word to describe the recovery. It all sounds good and frankly there are a lot of numbers that support all of this optimism.

So, at the risk of being labeled as one who longs for the good old crisis times, let me offer a few temperate thoughts.

First, a lot of the positive spin emanates from two places. Washington and New York. The first has never experienced a recession first hand in its existence and the second had such an uncomfortable embrace from one recently and found it so discomforting that it persuaded the first to shift an enormous amount of the country’s treasure to it in order to chase away the specter.

Unfortunately, outside of these two points of wealth and power, fly-over country as they like to call it, things aren’t so sanguine. Talk to people from “out there” and you get a different sense of reality. Some will tell you that they see improvement, others will tell you that it’s the worst they’ve ever seen. It all depends on where they happen to be from. What you won’t hear from any of them is a sense of comfort, a sense that things are under control and that the future promises greater economic security.

Tyler Cowen linked to a Kevin Drum column that’s interesting:

  • This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That’s not going to happen this time.
  • In fact, there won’t be any further stimulus from lower interest rates. They’re already at zero, and Ben Bernanke has made it clear that he doesn’t plan to effectively lower them further by setting a higher inflation target.
  • Consumer debt is still way too high. There’s more deleveraging on the horizon, and that’s going to make consumer-led growth difficult.
  • The financial sector remains fragile and there could still be another serious shock somewhere in the world.
  • There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely.
  • Housing prices are still too high. They’re bound to fall further, especially given rising interest rates combined with the end of government support programs.
  • Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road.
  • The Fed still has to unwind its balance sheet. That has the potential to stall growth.
  • Oil prices are rising. This not only causes problems of its own, but also makes #7 worse.
  • Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.

OK, so you’ve seen all of these in one form or another in a lot of other articles. And, yes, you can make the case that even in the best of times you could compile a list like that would suggest that the end of the world will probably occur before 12/21/2012. So, call Drum an alarmist but then consider this from Diana Olick:

Lender Processing Services just put out its “Mortgage Monitor Report,” and we have a new record:

The nation’s foreclosure inventories reached record highs. February’s foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase. The percentage of new problem loans also remains at a five-year high. The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. Furthermore, the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.

Ponder those numbers for a moment. If anyone had, for instance prior to say 2007 suggested to you that the nation’s homeowners would find themselves in this sort of predicament what would have been your reaction? Mine certainly would have been — are you kidding me. If that ever happened we would be in one major economic world of hurt.

Each time I start to buy into the recovery line I come face to face with these sorts of facts. And each time that happens and each time I talk to folks who aren’t feeling all that sanguine about their life I tend to become more convinced that we still have a big wall to climb. And, yeah, the folks in those two famous cities are pretty much divorced from reality, perhaps dangerously so from the perspective of their future prospects.