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Job gains in first quarter, broad recovery in 2010, expansion in 2011: Craig Thomas


Craig Thomas is Senior Economist at PNC Financial Services Group. Previously, he was director of research for Citi Property Investors, Citigroup’s private equity real estate arm. He is also author of The Econosphere, which is available at

www.theeconosphere.com.
 
H.L.: What does the December jobs number — the loss of 85,000 jobs — tell you?
 
C.T.: It’s disappointing. There’s no way around that. About half the economists were expecting a small positive, and the other half expecting a small negative, and we ended p with a much larger negative than we expected. That said, a little over 35,000 of those jobs are accounted for in particularly seasonal industries, retail, leisure and hospitality, and the Postal Service, which carries letters and packages for the holidays.
 
What this means is not that 35,000 people were turned away from these industries. Rather, these industries didn’t hire as many seasonal employees this year. The discrepancy involved the seasonal adjustment. As such, the number isn’t as bad as it looks.
 
H.L.: What’s your prediction for jobs this year?
 
C.T.: I think there’s no doubt we will have job gains in the first quarter of 2010. The broad array of economic indicators that we have are pointing toward a broad recovery for the economy. Even the now consistent hiring of temporary employees foreshadows the hiring of permanent employees in the months ahead. In essence, businesses like to date before they’re married.
 
H.L.: What do you predict for the U.S. economy in 2010?
 
C.T: A broad recovery. This downturn was almost all-encompassing. Almost all industries contracted severely. We had the largest inventory reduction in history, and we had sharper layoffs than we’ve had in decades. Also, we had almost the largest decline in retail spending in history. All of this has created significant pent-up demand across many industries.
 
As such, I expect the recovery will also be very broad, which is unique. Typically in a recession, the previous one for example, you had only a few industries going into sharp contraction, chiefly information technology. This led to an uneven recovery, with a few industries leading and few lagging.
 
In this case, given that the broad economy is very lean, we will have a broad recovery in 2010 moving into expansion in 2011.
 
H.L.: What’s likely to happen in the housing market, given the continuation of foreclosures and rising interest rates?
 
C.T.: Housing is increasing in better shape than it has been. This is chiefly because we have cut back sharply on the construction of new homes. The U.S. has roughly 1 million new households each year, and we are building less than 600,000 new homes. This has greatly decreased the excess supply of housing. This sets the stage for a stable and moderately rising house prices. Households will no longer be concerned that their home equity is disappearing. Four out of the last five months have shown rising house prices. This will be an important driver of consumer spending in the year ahead.
 
H.L.: What do you think will happen when the federal stimulus money stops flowing midyear?
 
C.T.: That is perhaps one of our largest challenges in the year ahead. The federal government has been essentially 100 percent of the secondary mortgage market. With the Fed prepared to no longer purchase agency debt I expect mortgage rates to rise. This will be a speed bump for the recovery, but the decline in the excess housing stock should be enough to maintain home values and support the housing market.
 
H.L.: How can the Fed gracefully exit from its quantitative easing and low interest rate policies without upsetting the economy?
 
C.T.: They can do two things: keep to their stated timeline, which they have been explicit on. The other thing would be to not wait too long to raise short-term interest rates. With the recovery looking sound, we should start thinking about the risks of rising inflation.
 
H.L.: Is current government policy the correct way to go to fix the economy?
 
C.T.: I wish I could answer, but I have no idea what current fiscal policy is. We have a tremendous amount of uncertainty today involving health care, taxes, energy, and even labor and trade. As such, all of us have less information as to the rules of doing business than we otherwise should have. The best thing the federal government can do is to work quickly to eliminate this uncertainty.
 
H.L.: Deficit spending has gotten huge, and data show that China, the traditional buyer of our debt, our Treasurys, has been a minor player recently, while the Federal Reserve has purchased the lion’s share of the notes that keep the government going. How can our economy sustain a recovery this way?
 
C.T.: We don’t want to be deficit spenders for a long period of time, and any excess borrowing will weigh on our currency eventually. The dollar is where Americans store their wealth and one of the most important things that the Fed and Congress can do is protect the value of our currency.
 

H.L.: The stock market’s surge since March has been way ahead of the economy’s recovery. What do you predict it will do this year?
 
C.T.: There’s certainly the likelihood that stock priced appreciation will slow this year. However, the fact that corporate earnings continue to rise means that there is a solid foundation built underneath current stock valuations. I’d be worried if we did not have improving earnings, but that’s just not the case. Corporate America has acted very swiftly to mend its balance sheets, and companies are in relatively good shape financially going into this recovery.



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