Expectations run high for the US economy to experience an acceleration from the paltry 2% per year GDP growth we’ve had since the crash. Surveys record optimism among purchasing managers, builders, and consumers. Manufacturing remains strong, and there are even hints of the long-awaited capital expenditures boom.
But dark spots muck up the picture of the engines that have been driving this slow growth of the US economy. Among them:
The unsustainable nature of auto sales. They have been powered by mad long-maturity loans with sky-high loan-to-value ratios to sub-prime borrowers — a boom that is already causing regulators to fret and is almost certain to end badly. Any decline in sales will hit auto production.
Weakening exports. As the US dollar rises, it decreases competitiveness of US goods overseas, even as the Japanese and European economies slow.
And the big one, a rollover of the recent housing boom, both new and existing home sales. Top real estate analyst Mark Hanson has been warning since late last year that the housing markets were rolling over — as described in this post, and at his website. Now a second voice speaks up.
Joshua Pollard was Goldman’s lead US housing analyst from February 2009 to March 2013. He has written a forecast for the US housing market in the form of a letter to the President. It can be downloaded from his website. He has some disturbing conclusions. It’s a deeper and more complex analysis than Hanson’s, but comes to similar conclusions.
House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession. Since World War II home prices have been tightly correlated to income and mortgage rates (R2 = 96%). Investors/cash purchasers, which make up 50% of home sales, have driven real estate volatility to unrivaled levels in trackable history. As public policy makers debate seminal decisions on “forward guidance” and unconventional monetary stimulus we note that each 1% increase in rates drops home valuations by another 4%; at a 2% fed funds rate, where fed officials and investors expect to be by the end of 2016, the overvaluation equals 20%.
Respectfully, the United States cannot afford another housing driven recession. The facts and correlations – the tenets of probabilities – suggest it is more likely than not that home prices fall 15% in the next three years.
It’s a top-down view, unlike Hanson’s ground-level perspective. If Hanson and Pollard are correct, then America might start a downturn from a position of weakness unique since the Second World War – with the Fed funds rate and short-term interest rates already at near zero!
Now for the bad news…
After five years of slow growth, most economists expect accelerated growth, as they do each year, only to see their hopes dashed. In January 2011, the Federal Reserve estimated the long-term growth rate of the US economy at 2.5 – 2.8%. This week the Fed’s estimate had fallen to 2.0 – 2.3% — barely above the 2% “stall speed.” Also their forecasts for 2014 – 2016 have steadily dropped.
Why these low and dropping growth rates?
There may be structural forces at work. Years of low investment by the private and public sector, a decaying education system, rising debt levels, and the demographic headwinds of an aging society — all these factors reduce America’s ability to grow. By Editor, Fabius Maximus.
“Escape Velocity,” that illusory surge in the economy that has been trotted out for five years in a row to rationalize soaring stock prices? The Fed has wiped it from its vision of the future. Read….. Fed: Forget “Escape Velocity,” Not Gonna Happen, Ever