Fri, 05.27.11 2:24pm EST
Van Eck Hotline on Money and the Economy
For: Friday, May 27, 2011
The U.S. economy remains in recovery mode. In many respects, things have been progressing according to historical norms. Job growth for the recovery to date has been about average. In fact, it has been stronger than a number of other recoveries of the past 40 years. However, there are several important differences this time around. The housing market has been lagging (thanks to the reckless speculation of the first half of the last decade and then the popping of the bubble during 2006-2009). Since then, housing has basically run in place in many of the local real estate markets in America. As a result, home construction has remained quite weak and the economy has missed out on a tremendous amount of new hiring and taxes paid. That story has made big headlines during the economic recovery of the past two years. Now the situation is showing clear signs of improvement, but the mindset in the nation is so negative that most people do not want to hear the truth. Instead, they prefer to wallow in misery – embracing the ultra bearish messages from the usual suspects on Wall Street and in the media. Those skeptics are saying that the housing market is destined to remain in the dumps for many years to come – perhaps even another 10 to 20 years. Hogwash!
America is facing a developing crisis in housing but it is not the one that you hear about everyday in the media. The crisis is one of too few new homes available for sale. April was the second strongest month of the past year for new home sales. Many builders have been unwilling or unable to begin the construction of new homes. As a result, the inventory of new homes has steadily shrunk – hitting a new record low of only 175,000 in April. Not so long ago, such a low inventory of new homes would have been unthinkable. However, the financial crisis and recession of 2008-2009 changed the way many people view the past, present and future. That is the other major difference in this recovery compared to many others of past decades. It has become downright fashionable to be negative about the economy. Despite nearly TWO FULL YEARS of growth in GDP, many people continue to pound away at the theme of recession. You can see that negativity in everything from politics to pop culture.
I cannot tell you how many times every week I see or hear a commercial that claims America is still in a recession. Fear sells – just as greed sells during bubbles. Human beings have a tendency of expecting the recent past to extend indefinitely into the future. When it comes to the economy, that attribute has kept some business managers from hiring new employees (despite strengthening demand for their products and services). The distinct lack of confidence in the recovery has held growth back from reaching its potential. So far this year, a number of other factors have also pulled back a bit on the economic reins. They include higher energy prices and the earthquake in Japan. As a result, GDP expanded at an annual rate of “only” 1.8% during the first quarter. The second quarter will also likely come in below my previous target of 3.0%+. Looking out to the second half of the year though, I expect the recovery to get back on track.
Energy prices have already slid significantly from their recent highs. Just as importantly, the supply and order disruptions in U.S. manufacturing caused by the quake and tsunami should begin to reverse later this year. In the near-term though, the bears should have a few weak economic reports to cheer. However, their window of opportunity is closing. The best case scenario for the bears appears to be forcing a minor correction in the U.S. stock market. As has been the case with every other dip in the market during the past two-plus years though, it should then be followed by a persistent up trend as the bull market trend resumes control. That outcome would leave a lot of people in the bearish camp feeling disappointed and confused. I urge you not to be in that crowd. You should be planning for a stronger economy later this year and a new high for the bull market. When it comes to housing, the media will spend the time ahead obsessing about year-over-year declines in sales and prices. That statistical noise is more a reflection of the government’s tax credit offers for homebuyers during late 2009 and early 2010. The trend for home prices in much of the country during the past two years has been flat. I expect home prices to improve during the year ahead as the economic recovery develops and both job and wage growth improve.
With a shortage of new homes becoming an increasingly obvious problem, we should see housing starts and construction take on new life during the year ahead. That would provide another leg beneath the ongoing recovery in the economy. The irony of such an outcome would be that so many analysts have been predicting a second collapse in the housing market. In fact, some of the better known bears are saying that home prices will crash by 30 to 50 percent during the years ahead and that the decline will help to send America into a prolonged economic Dark Age. I urge you to set aside your personal political beliefs and approach the economy with a fresh attitude. You can dislike the president and his politics and policies all you want – just make sure that such beliefs do not block you from participating in the ongoing recoveries in the economy and stock market. A year from now, as the 2012 election looms ever larger in the road ahead, the economy will likely be stronger than it is now and housing will be in better shape as well. That is going to pull the rug out from beneath some political strategists, but in the end such trends are good for America and good for you.
The latest jobless claims report was released yesterday. It showed claims at 424,000. While that was above expectations and still stubbornly above the 400,000 level, it is far from presaging a new recession in the U.S. economy. Claims are still down significantly from their level of a year ago (467,000) and far below their level of two full years ago (611,000). A number of temporary factors have been helping to elevate the jobless claims total during the past six weeks. Weather, government job cuts and problems with auto production due to disruptions in Japan (earthquake) have all played a role. Some people view the recent bump higher in jobless claims as a sign of an end to the recovery (if they have even been willing to say that the economy has recovered during 2009-2011). A week from today, the May employment report will be released by the government. Given the persistently elevated readings of jobless claims of late, it seems safe to say that the number will be weaker than the April figure (which was the strongest showing for nonfarm payrolls since early 2006). The stock market needs to burn off some remaining froth. A month or two of weak looking jobs reports would go a long way toward clearing the decks and thus setting up a scenario where the stock market could spend the rest of the year trending into new high territory for the bull cycle.
At the start of this Hotline, I said that the current recovery in the economy has been following many of the historical norms that have marked other recoveries. Money is the lifeblood of the economy. It is like oxygen to a living animal and fuel to an engine. There has been a lot of talk about how the recent rebounds in the economy are just repeats of what happened in the early days of the Great Depression. A lot of analysts are banking on a second major leg down in the economy and stock market during the time ahead – just as was the case back in the early 1930s. Back then, the Federal Reserve and Treasury made the huge mistake of cutting back on the money supply at just the time when the economy desperately needed more liquidity – not less. Between 1927 and 1934, four different men held the post of Fed chairman. That led to some disjointed policies and the very wrongheaded decision to cut the nation’s money supply by more than 20%. This time around, the Fed has been led by one of the great living authorities on the Great Depression. Ben Bernanke spent a great deal of time in his college days studying that crisis and I believe history put him in the right place at the right time to help stave off a true disaster in recent years. The Fed has kept the economy well supplied with money and I expect that policy to continue during the time ahead.
The Fed’s willingness to keep interest rates near zero and money supply flowing has allowed banks to slowly but surely take their foot off the brake. While it has not gotten much play in the media, banks have been increasingly willing to make loans. The change began with big companies – which most banks view as a better risk. However, the pace of new loans handed out to smaller businesses has also expanded. More recently, evidence has shown that consumers are finding it easier to get installment loans from banks. A recent survey by the Federal Reserve showed that about one third of banks increased their willingness to make such loans. That is a big improvement from the dark days of the recession, when nearly 50 percent of banks were pulling back on such loan activity. The weekly and monthly economic data might weaken a bit in the near-term, but the broader trends of bank lending and other forces look like they are going to support a prolonged recovery in the economy. Plan accordingly.Momey