Recovery's a Process and There's a Long Way to Go

Includes: DIA, QQQ, SPY
by: Richard Haskell

We continue to receive inquiries regarding the strength of the economy, both global and domestic, and questions regarding why there still seems to be economic uncertainty and pain in the face of widely reported economic recovery. The truth is that the US economy, as well as that of many other foreign countries, has now been in recovery mode for over a year. But being in recovery is very different than having recovered and this particular recovery will likely drag on longer than anyone might have hoped.

It’s going to be a while before the pain subsides and the marketplace returns to what might be considered normal. With unemployment remaining close to 10% and the US housing market continuing to struggle, we’re likely to see several additional years of less-than-optimal growth trends. Even then, it’s unlikely we’ll see the high growth rates of the mid-2000‘s. The reasons are many of course, but there is one factor beginning to become more readily observable than had been expected.

America is beginning to retire and the baby boom retirees are set to consume investment capital at a much faster rate than employ it. While the average retiree may only possess less than $200,000 in investment assets, the impact of millions of new retirees drawing from their investment accounts, rather than adding to them, is unmistakable.

Though this shift may not be the central cause of the housing and employment market difficulties, it’s certainly a contributor to prolonging them.

More retirees are turning to lower wage employment for supplemental income and as a means of staying occupied than ever before. Not only has this had an impact on younger workers seeking employment, it’s made it more difficult for recently unemployed workers to find short-term employment while seeking a more appropriate permanent position.

Many of those who purchased second homes in the last 10 years did so with the intention of retiring in the smaller of the two homes and as then sell the larger. Though the opportunity sell may not be as strong today as it was when these near-term retirees began to execute their plans, a large percentage choosing to sell what had previously been their primary residence. For many, this has become preferable to renting the larger home to others or waiting until higher home values are available and selling. Additionally, most retirees didn’t plan on the expense of supporting two residences, possible even two mortgages, during their retirement years. This has exaggerated problems in the housing market and aided in keeping prices low and inventories high.

To be certain, the effect of retirees on the investment, employment and housing market may not seem substantial, but in a nation of complex and interdependent markets even small changes form important outcomes. For those who doubt this, just consider the overall economic impact experienced by a 4% increase in unemployment or how significant it becomes to go from a surplus of 2% to a loss of 1% - it may only be a small move in relative terms, but in many cases it means the difference between winning and losing for households and businesses.

All of this adds to the numerous other factors supportive of a prolonged period of low growth and may cause governments, businesses and households to adjust the way they look at financing operations and where they turn for investments. We’re already seeing that states are reeling from budget issues at first thought to be temporary and businesses have sought capital-consuming productivity gains over bringing back displaced workers.

Though we’ve eschewed the concept of a “new normal”, it’s important to note that the effect of demographic changes, increased federal debt burdens and impending cost changes due to regulatory, tax and healthcare legislation have adjusted the landscape for businesses, households and governments.

What continues to be impressive is the strength and resiliency of the US consumer and domestic economy as a whole. Regardless of how daunting issues may appear to some, the bulk of decision makers are prepared to move forward and challenge fear in search of what comes… and that may be the important factor of all.

Disclosure: No positions