If the Federal Reserve Board’s monetary gurus — technically, the Open Market Committee — were given to exuberance of the sort some pedants might consider irrational, at the conclusion of last week’s meeting they might have declared the dawning of a decade of growth and prosperity. Central bankers don’t say such things, of course, or even think them. Instead, we get the following: “Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve… Financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in the context of price stability.”
So things are looking up for the U.S. economy — light at the end of the tunnel, or even emergence from it. True, the ever-cautious Fed, in support of its decision to keep interest rates close to zero, also said that although household spending is picking up, it is still constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit.”
Two of these seeming negatives are in fact good news. “Modest income growth” is a lot better than falling income; and “tight credit” is inducing consumers to use some of that increased income to pay off debt, and to fund their increased spending from money they are actually earning. This is the rebalancing of the economy away from heavy reliance on consumer debt that economists have been saying is necessary to the sustainability of the recovery and the long-term health of the economy.
“Lower housing wealth,” a problem for those whose mortgages exceed the value of their homes, is also not unambiguously bad news, especially now that such news no longer shocks homeowners. It might well mean that the housing bubble has finally been pricked, and the basis has been set for at least a modest recovery, of which more in a moment.
News on the earnings front remains positive. Caterpillar, the world’s largest manufacturer of earth-moving equipment, and therefore a good indicator of trends in the construction industry, reports robust earnings. Jim Owens, its CEO, reports a sharp bounce-back in orders and earnings, and adds that neither his dealers nor his customers foresaw “the V-shaped recovery” that is now upon us. Ford, which bet the company by mortgaging every asset it had to avoid the embrace of the government and be free to develop models consumers would buy, earned its fourth consecutive quarterly profit ($2.1 billion, its best in six years) and is expected to be in the black for the entire year. The world’s largest manufacturer of appliances, Whirlpool, rode sales increases of 65 percent in Latin America and 60 percent in Asia to a more than doubling of first quarter net earnings, continuing the trend of overseas earnings increases we reported last week.
To which I might add a bit of anecdotal evidence. Airlines are reporting significant increases in sales of relatively expensive business class tickets. Sales of the new iPad are exceeding expectations. And on a business trip to Phoenix last week, I found the resort hotel at which my meetings were held, a place of ghostly silence immediately after the president attacked companies who held customer or employee meetings in these places while Main Street was suffering, to be full to capacity. The lingering effects of the downturn were noticeable: Room rates have eased, and employees are again glad to greet guests pleasantly, novel experiences compared with pre-recession boom times. In fact, housing and hospitality are not the only sectors showing life in this hard-hit southwest area: Brian Burke, a partner with Snell & Wilmer, the state’s largest law firm, tells me that the securitization business is showing signs of life.
The earning reports and that anecdote comport with the latest data. First-quarter GDP was up 3.2 percent, as consumers showed up in shops to absorb some of the products that made up the inventory build-up of the fourth quarter of last year. Orders for durable goods (excluding the volatile aircraft component) rose 4 percent in March, following a 2.1 percent increase in February. No surprise, then, that consumer confidence is at its highest level since the financial crisis wiped out a good part of wealth in September 2008.
But don’t pop the champagne corks just yet. There are three clouds on the economic horizon, one sufficiently dark to threaten a thunderstorm that will drown even the hardiest green shoots. The first is the jobs market. The hemorrhaging of jobs has stopped, and some new jobs are being created. But too few to bring down the unemployment rate, at least now or soon. Indeed, there is now talk of an unemployment rate of around 10 percent being the “new norm.”
The second possible problem is the housing market. It is difficult to pierce the fog of contradictory data. Sales of existing and new homes are up, and house prices, although slipping last month, remain above year-earlier levels for the first time in three years. Richard Smith, CEO of Realogy, a property firm that operates in all 50 states, says activity at the very high end of the market is “phenomenal.” And on a recent trip to Phoenix, perhaps the most depressed housing market in the nation — having previously been one of the most inflated — I was told that property developers are buying up developed lots in anticipation of a construction recovery. These lots already have water, gas, electric and other infrastructure in place, and are being bought at bargain prices by builders who have been able to ride out the downturn from those who were not so fortunate.
Here comes the inevitable “on the other hand.” The tax credit for home buyers expired yesterday, there is a large overhang of unsold homes, foreclosed properties continue to put downward pressure on prices, and banks are tight-fisted when it comes to new mortgage commitments. Yale professor Robert Shiller, a close student of the housing market, doubts there will be a double dip, but expects the sector to perform less well than the overall economy, especially if the current unemployment rate of around 10 percent persists.
Finally, and most importantly, lying in wait to ambush the recovery are the president’s tax increases on “the rich,” the costs of the health care “reform” legislation, a cost-increasing energy bill that is ready to be introduced, a congress seemingly determined to make a whipping boy of the financial sector, and defaults by some cities that are sure to rattle investors.
Not to mention a possible financial crisis in euroland as Greece is forced to restructure its debt, wiping billions off the balance sheets of the German, French and other banks that hold Greece’s IOUs, and making investors still more nervous about sovereign debt. Already there is talk of America becoming another Greece later in this decade if we do not bring our deficit under control. Default on U.S. government bonds is not in the cards — the printing presses stand ready to provide a bailout. But the threat of inflation could at some point loom large enough to prompt investors — the so-called bond vigilantes — to demand higher rates for their money. That would certainly bring any emerging decade of prosperity to a screeching halt before it has time to mature.
