CRE Midwest

U.S. economy sending mixed signals

| markt

The U.S. economy is sending mixed signals in the current recovery. Activity levels indicate a healthy market that is approaching self-sustaining growth, yet the historically high unemployment numbers suggest an economy that is still in a significant struggle, says a former Federal Reserve economist.

The U.S. economy is sending mixed signals in the current recovery. Activity levels indicate a healthy market that is approaching self-sustaining growth, yet the historically high unemployment numbers suggest an economy that is still in a significant struggle, says a former Federal Reserve economist.

“We are on the cusp of a self-generating economy,” said Sam Kahan, president of Kahan Consulting and a former Federal Reserve economist, at a Real Estate Investment Association (REIA) meeting in Chicago on Thursday morning.

“The economy is gaining its footing. Real GDP grew 3 percent in 2010. I expect this to continue to increase, and GDP will grow between 3.5 and 4 percent in 2011,” Kahan said.

The fourth quarter of 2010 showed especially good signs as every sector was up, including consumer spending and housing, he said.

“The only thing that pushed the economy down was inventory accumulation,” said Kahan. “If that was ignored, GDP would have been around 7 percent.”

Overall economic activity has returned to pre-recession levels. Production and economic growth is back to where it was in the fourth quarter of 2007. Yet while the economic output may be solid, there are still numerous elements that point to a troubled market.

Unemployment remains stubbornly high, banks are still tight on lending and the housing market is still a source of pain for many Americans. The economic engine may be humming along, but a great deal of people may not feel that they are along for the ride.

Yet Kahan said that there will be more relief for many this year as employment should begin to pick up.

“The U.S. created 75,000 jobs a month in 2010 and I expect that number to be 175,000-to-200,000 per month in 2011,” said Kahan.  “That is not great, but it is an improvement.”

More jobs may be created this year, but because the current unemployment rate likely does not reflect the actuality of the market, the rate may remain fixed throughout the year at around 9 percent.  Many out-of-work Americans have given up their employment search and are thus not counted in current employment numbers. If the job market begins to warm up, they will likely enter back into the market. This “shadow employment” number will stall any significant decrease in the unemployment rate.

Other topics addressed:

  • Banking Industry: Banks are beginning to reenter the market. Kahan noted that the Federal Reserve does a quarterly bank survey on confidence and that in the last six months banks have indicated that lending restrictions have eased. Commercial and Industrial loans have now climbed to the rate at which the last recession of 2001-2002 bottomed at.
  • Housing: Kahn believes that the worst of the housing crisis is behind us, but that it will be a very slow recovery process. Housing starts are significantly down, but the market is still receiving new inventory as banks are beginning to put more foreclosed properties back into the market.
  • Auto market: The beleaguered auto market showed signs of life in the second half of 2010 and it should continue to improve as “pent up demand is enormous.” In 2010 light vehicle sales approached 11 million units. Kahan believes that number could reach 14 million units in 2011.
  • Inflation: Inflation measured .5 percent in 2010 and Kahan believes that it could increase to 2 percent by end of 2011. This is not because of food and commodities, but because of increased rents. He said that it is difficult to say what inflation will do in the long term, but that there is “strong possibility” of inflation acceleration.
  • Debt: Currently the U.S. is between 55-to-60 percent debt to GDP ratio. Kahan said that we still have time to correct this, but that if the number gets to 85 percent debt to GDP ratio, it would grind the economy to a halt.
  • Interest Rates: Short term rates (10-year) will likely start to rise next year, said Kahan. Only the Fed is privy to when, but interested parties should look for a two-to-three month string of consistent employment gains in the 250,000-350,000 range as a clear sign that an increase will soon follow.