5 reasons the economic recovery will continue to be anemic

05.29.2011 - Money Matters

While we are not economists by training, we believe the significant headwinds the nation faces along with a good dose on common sense will keep consumers, which represent 70% of the economy, from returning to previous spending patterns anytime soon.

1.   Unemployment

Unemployment continues to be stuck in the 9% range and is likely to remain stubbornly stuck there for years to come despite the upcoming Presidential election.  Indeed, a number of pundits have suggested that the “new normal” for unemployment may well be in the 8% to 9% range.

2.   Housing Market Woes

The weakness pervading the United States housing market continues unabated and prices are expected to decline further.  John Mauldin’s recent “Outside The Box” newsletter, excerpts a portion of the May 2011 edition of A. Gary Shilling’s INSIGHT, where he estimates that there are some 2 to 2.5 million excess housing units today that will take about five years to absorb.  Until the excess inventory is worked off prices are unlikely to rebound.

3.   Quantitative Easing II

The Federal Reserve Bank’s Quantitative Easing II will cease at the end of June which in all likelihood will cause long term interest rates to climb.  An increase in mortgage rates will further dampen the housing market and consumers appetite to spend.

4.   Sovereign Debt Crisis

Eventually Europe’s sovereign debt crisis will play out, probably sooner than later, and there will be either a default or a restructuring of the debt.  Greece is most likely to hit the wall first as indicated by the increase in the interest spread of its bonds over those of Germany, though Ireland will not be far behind.  The global financial system is so interconnected that any default or restructuring will reverberate throughout the world economy and the consequences will not be good.

5.   Debt Ceiling and Deficit Reduction

Congress’s failure to reach a compromise in the battle over the nation’s debt ceiling will cast a further pall over Washington’s credibility in the financial markets.  This is but the opening salvo in a much larger battle to come up with a credible plan to reduce the nation’s deficit without which interest rates are sure to rise.   Ultimately, either taxes will have to be raised and/or government spending cut all of which will put a brake on the economy.

“I remember when I first came to Washington. For the first six months you wonder how the hell you ever got here. For the next six months you wonder how the hell the rest of them ever got here.”  President Harry S. Truman