Tuesday, May 29, 2012

Tough Economy Continues ... Long Term Optimism Does As Well


In thinking about our economy and its future prospects, it's easy to still be quite optimistic about the longer term despite the current FUD factors in evidence (FUD = fear, uncertainty and doubt).

And with respect to the uncertain future we're facing as individuals and as a nation as well, it's worthwhile to remember that the future is always an uncertain one.  It's just that when things are going well, we humans tend to ignore that omnipresent certainty about the uncertainty of the future. But when things are difficult, FUD arrives and gets our attention in a hurry.

Got it?  If so, let's continue.

So while we should remain quite optimistic, albeit uncertain, about the longer run, we also need to remind ourselves of what John Maynard Keynes once said, "In the long run, we're all dead."

And despite that certainty, it's important to know how we can justify being so optimistic today in the presence of so much doom and gloom throughout the world.

This fall's U.S. election will be an important one for sure, but it won't alter our freedom loving entrepreneurial leaning self governing society of We the People over time, however we may choose to vote this fall.

Getting Specific

Home prices are low and consumer confidence remains in the dumpster as confirmed by two reports out this morning.

Home Prices Stuck at Low levels describes the current situation and near term outlook as follows:

"U.S. home prices ended the first quarter at the lowest levels since the housing crisis began in mid-2006, according to Standard & Poor's Case-Shiller home-price indexes.

Separately, U.S. consumers in May were less confident as their views on labor conditions deteriorated, according to a report released Tuesday.

Home Prices

During the first quarter, home prices reached new lows, falling 2% sequentially and 1.9% year-to-year. Prices are down roughly 35% from their peak in the second quarter of 2006.

The Case-Shiller index of 10 major metropolitan areas was down 2.8% in March from a year earlier.

The 20-city index was off 2.6%. Month to month, the declines were 0.1% for the 10-city index, while the 20-city prices were basically unchanged.

As of March, average home prices were at levels reached in late 2002 for the 20-city measure and early 2003 levels for the 10-city composite.

Demand for homes has been showing some signs of stabilization, as low-mortgage rates, some loosening of credit conditions and improved job growth have pulled some buyers back to the market.

However, "while there has been improvement in some regions, housing prices have not turned" said David Blitzer, chairman of S&P's index committee. Despite some better numbers in the latest period, "since we are entering a seasonal buying period, it becomes very important to look at both monthly and annual rates of change in home prices in order to understand the broader trend.""

Consumer Confidence Drops

The Conference Board, a private research group, said its index of consumer confidence dropped to 64.9 this month from a revised 68.7 in April, first reported as 69.2.

Confidence has fallen for three consecutive months. . . .

Within the Conference Board's report, the present situation index, a gauge of consumers' assessment of current economic conditions, dropped sharply to 45.9 from a revised 51.2 first reported as 51.4.

The May present situation index was the lowest reading since January.

Consumer expectations for economic activity over the next six months fell to 77.6 from a revised 80.4, originally reported as 81.1.

"Consumers were less positive about current business and labor market conditions," said Lynn Franco, director of the Conference Board Consumer Research Center. But she noted income prospects improved, "which should help sustain spending."

Views on the labor markets deteriorated this month. The board's survey showed 7.9% of respondents think jobs now are "plentiful," down from 8.4% thinking that in April. Another 41.0% think jobs are "hard to get," up from 38.1% last month.

Consumers are also concerned about the job situation over the next six months. The report shows only 15.8% think there will be more jobs, down from 16.9% thinking that in April, while 21.0% think there will be fewer jobs, up from 18.4%."

Summing Up

The problem with decreasing home prices is an easy one to explain.

Home prices essentially doubled between 1996 and 2005.  Now they're reverting to their long term price level. When the bottoming process is completed, home prices will resume their long term trend of staying up with but not ahead of inflation. We may have seen the last housing pricing bubble of our lifetimes.

The problem with low consumer confidence is also an easy one to explain.

Consumer confidence is low because good jobs are hard to find, unemployment is high, home prices are declining and consumer debt remains elevated. Too much debt and too little income certainty, in other words.

Of course, debt, confidence, unemployment and home prices are all contributing factors to the lack of consumer confidence.

Thus, we have a ways to go to clean up our financial act. Until that's headed in the right direction, things will stay tough for far too many of our fellow Americans. And for people throughout much of the rest of the world, too.

But bad brings good.

Slow economies often bring low interest rates, low oil prices and reduced food prices as well. These consumer aids are all part of the economic healing process at work.

That said, the hole we dug for ourselves over the past several decades is a deep one indeed, so it will us take some considerable time to escape from it.

To begin to do that, of course, we must first realize that we need to stop digging. That we know now.

So that's a big part of the reason why I'm optimistic about the longer term. When we finally stop digging, we'll have begun escape mode.

And stop digging we will.  I just don't know exactly when that will occur. But it will because it has to eventually.

That's because of another truism---if something can't go on forever it won't.

This continuous hole digging can't so it won't.

Thanks. Bob.

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