Spring Fever Optimism: Economic Forecasters Are in For a Surprise

Maybe it's because famous groundhog Punxsutawney Phil saw his shadow, which suggests that the end of winter is right around the corner, but it looks like some economic forecasters are beginning to ooze with spring-fever exuberance.

Freddie Mac (FRE), for one, remains upbeat, according to Reuters, despite growing problems in the mortgage finance arena and a continuing supply-demand mismatch in the housing market that will exert a major drag on economic activity for the foreseeable future.

Housing activity has slowed from recent years but the dragdown should not lead to a recession, mortgage finance company Freddie Mac said on Thursday in its monthly economic outlook.

"Any risks the housing contraction could spark an economy-wide recession are fading fast. After subtracting 1.2 percentage points from GDP growth in the third and fourth quarters of 2006, the drag from further declines in construction spending should peter out toward mid year," it said.

Freddie Mac said inventories of new homes are higher than reported due to cancellations of sales contracts. Inventory buildup is also understated due to homeowner vacancies of condos, it said. "Housing activity is stabilizing at levels well below recent years," it said.

The gap between supply and demand may not be sufficiently narrowed until late 2007 as home prices will likely remain on the higher end, the housing finance giant said.

"Sellers are gradually and reluctantly lowering their asking prices in response to the new reality of a buyers' market," it said.

Faced with data that has historically signaled rough sledding ahead, some forecasters nonetheless remain optimistic, relying instead on the old chestnut "this time it's different." Writes Reuters:

Federal Reserve Bank of Cleveland President Sandra Pianalto said on Friday the inverted yield curve -- higher interest rates on shorter-maturity securities than on longer-dated ones -- is probably not a portent of recession.

"I believe that this is one of those periods of times where that's not going to be the case," she said in response to audience questions after a speech.

Others are also relaxed, apparently believing that an overleveraged, overextended, and grotesquely distorted economy is unlikely to falter without first being dealt some sort of death blow, plain for all to see.

So, after four and a half years of economic growth, a recession has to be just around the corner, right?

Don't be too sure, economist Nicholas Perna said at yesterday's luncheon sponsored by the Building Owners and Managers Association at the Crowne Plaza in White Plains.

An economic adviser to Webster Bank, Perna said there is no such thing as an average length of time for an economic recovery. Time periods between recessions can last as short as one year or as long as 10 or 11 years, he said.

Recoveries are interrupted by the unforeseen, Perna said. The recession that started in March 2001 was extended by the Sept. 11 terrorist attacks. The massive recessions that plagued the 1970s followed the OPEC decision to quadruple the price of a barrel of oil in the wake of the Six-Day War.

"It's surprises that tend to produce recessions. And surprises, by definition, are impossible" to predict, Perna said. "I think we've got the wherewithal here, if we don't have a big spike in interest rates, to ride this thing out for a while."

I have a feeling Mr. Perna, among others, is going to be quite surprised by what's ahead.

Comments

[Sr. Pessimist:]

It's going to be nice to see these people finally convince themselves of something wrong, like this spring economic optimism, put their money where their mouths are and bet their stability on it, expect to get their way because they talked to the right person or whatever, and eat it big-time because they were dead-wrong about reality. I want morons out of economic control of this country. Either your mind should be flexible to accept what's more likely, or you should face your own consequences. I just hate how the morons are affecting everybody here. Damn the US Dollar. It unifies us all. I want morons the hell away from me. I want a different currency for each state. If California gets too US, I'd like to be able to just go to, like, Florida, and have a totally different way of life, and get my wishes more easily than throwing my hands up and emigrating to a whole new country.

2007 Feb 12 09:49 PM