Wednesday, December 29, 2010

Wrap Up and Forecast

The Lehmann Letter ©

Today's New York Times


and Wall Street Journal


carried retrospectives on the economy and residential real estate as well as a cross-section of forecasts for 2011.

The optimists point to expansionary monetary and fiscal policy: The recent round of tax-cut and unemployment-benefit extensions as well as the Federal Reserve's expansionary stance. The holiday shopping boom buttresses that rosy view.

This letter remains skeptical. Housing was the epicenter of the boom and bust, and housing continues in a slump. That's symptomatic of the damage done to household balance sheets: Diminished net worth and liquidity plus an overload of debt. Consumers will recover, but slowly. Expansion will be moderate.

Improved business productivity throughout the slump did boost earnings as business layoffs exceeded the drop in sales. That, of course, shifted the burden onto the shoulders of those who are now unemployed. Meanwhile this source of profitability is tapped out. Additional growth in earnings will have to come from additional sales. Those sales will grow slowly as household balance sheets gradually recover.

The economy eventually snapped out of the 1990-91 recession and began growing strongly in 1994 because of the beginning of the dot-com boom. The economy also bounced quickly back from the 2001 recession because of the residential real estate boom. Those were special circumstances that created especially good fortune in those decades. It's hard to see similar tidings on the horizon this time.

That doesn't mean no recovery, and it doesn't mean double-dip recession. It does mean slow and gradual gains.

© 2010 Michael B. Lehmann

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