Will The Ball Bounce?

The Lehmann Letter ©

Today President Obama, Fed Chairman Bernanke and Christina Romer, Chair of the President’s Council of Economic Advisors, all expressed hope that the economy may be bottoming out.

A few days ago Laurence Summers, Chair of the President’s National Economic Council, said that the economy no longer looked like a ball that had rolled off the edge of the table.

The Big Question: Will the ball land with a thud, like a baseball, or bounce like a tennis ball?

There has been some good news and the stock market has perked up, but a number of important questions remain. Here are two.

First: Has residential real estate hit bottom and when, and how swiftly, will it recover? Residential real estate led us into the trough and we won’t emerge from the trough until real estate snaps back. How will we know? When the foreclosures stop, home prices begin to rise nationwide and construction and new-home sales perk up. There are signs of life in some markets associated with purchases of foreclosed properties, but that’s not enough.

Second: Have households’ balance sheets mended sufficiently for households to resume robust borrowing and spending? Households’ balance sheets suffered when home and stock-market values plunged and indebtedness did not. The result: Net worth fell and liquidity dried up. Households won’t return to their spending ways until their balance sheets are repaired. And that will take time.

The ball may have stopped falling, but don’t expect a bounce.


© 2009 Michael B. Lehmann