I read a blurb today in the Wall Street Journal about economists expecting a weak housing market. One of the commenters remarked how economists can never seem to get their forecasts right and I just had to respond. I thought my response would be worth posting here as well.
I read the WSJ article regarding the widespread dispersion and quantity of high rate mortgages. I have only one conclusion – There will be a massive federal program in place by this time next year. The banks will be (or are) working congress in earnest. It will be politically popular because all home owners worried about a downward cycle fed by ongoing forclosure problems will support the total bailout regardless of whether or not they are at risk of losing thier home. No one wants to see the bulk of their equity evaporate nor the banks their earnings capital and bonus.
As for the economists they are a lagging indicator. As a group (including Fed and Alan G) they did not see it comming, then they pronounced it contained. Now they are going for another swing and miss by believing Fed actions have solved the problem. Most economist do like the National Association of Realtors – just revise their forecast down every month and put some positive spin on the future.
My response is below:
Economists have a much harder job than you think. There is not a blackboard in the world that is large enough to include all of the variables having an impact on any given economic situation – political, historical, social, etc… Imagine playing chess against a team of over 100 people IN ONE GAME! Each turn a new player sits down to take you on – all the while you have to readjust your strategy based on what you THINK this new player might do. Try the same in a poker game and let me know if you are any better off. My point is that before you discount what economists do I recommend you consider in earnest the complexity of our economy alone as well as within the context of the global economy.
As far as why Economists are not as gloomy on jobs and economic growth – the writing is and has been on the wall for some time now; in some cases since the mid 1940’s. The jobs situation is a double-edged sword. Beginning this January an estimated 356 Boomers an hour will begin retiring and/or collecting their social security checks. This is good for job seekers as a deluge of new positions open up; but since there are not enough skilled workers to make up for the losses we can expect to see the job situation become an inflationary problem as employers are forced to spend more for what skilled workers they can find and retain. Depending on how competitive the industry is those higher costs will surely be passed on to the consumer in the form of higher prices.
Another effect the Baby Boomers will have on our economy and society as they begin collecting their Social Security checks is the enormous amount of money that will be required to fund those payments. Back around 1946 the U.S. had over thirty workers paying into the system to support every Social Security recipient; now that number is around three. Think about that – it takes you and two of your friends to pay for just one recipient. The money will have to come from somewhere (read probably higher taxes). So skilled workers might see a healthy increase in their earnings but they might also see Uncle Sam’s cut rise accordingly.
More to ponder – the current slowdown in housing and related credit crunch are healthy corrections in the market; but I do not expect the worse to be over. This month alone an estimated $50 billion in ARMs are expected to reset. We can reasonably assume that a material percentage of those will end up in foreclosure – a trend in motion stays in motion until a sufficient force can slow or reverse it. If the typical foreclosure process takes between 3 and 6 months then we can expect many more homes to get dumped onto the already ballooning foreclosure market around the January-March time frame. I will let you ponder the effect of such on family financial positions as well as the typical American home’s ego (value).
Probably the most ominous and equally discounted is the credit position of our nation. A fundamental economic idea is that savings and investment provide for long-term benefits – lower interest rates, higher productivity and increasing economic growth. However, the U.S. savings rate has been negative for the last few years. Eventually the profligate spending that has been bolstered with cheap money and lax lending is going to reach its apex and the re-adjustment that will ensue does not look good. Over 65% of the U.S. economy is fueled by consumer spending. What happens when the credit cards get maxed out and there is nothing in the savings account to keep up us at the register?