Posted on Monday, December 20, 2010
While signs show the economic recovery is strengthening, palpable change is still a long way off. Falling home prices and high unemployment aren't expected to significantly improve any time soon.
Looking forward about six months, the economic forecast is slightly rosier than it has been, as the Leading Economic Indicator index increased in November, according to Friday's release. The LEI index, a composite of 10 predictors of growth, rose 1.1 percent in the month, its biggest gain since March.
But with unemployment high and home prices falling, real change won't be felt for a while. The LEI improvement signals that economic growth is durable. The speed and strength of this growth, though, could continue to be disappointing.
"It's to me a very reassuring sign," said Stuart Hoffman, chief economist of PNC Financial Services Group. "But it doesn't mean that the economy is going to take off."
If nothing else, the LEI shows the economy is indeed on the mend, economists say. Nine of the 10 components of the index -- including stock prices, consumer expectations and manufacturers' orders for goods -- improved in November. The LEI generally predicts trends about six months before they materialize.
But the housing market and unemployment situation remain bleak. With the fall in home prices expected to continue, and even to accelerate, the foreclosure crisis is likely to drag on. And as unemployment remains stuck at 9.8 percent, six in 10 out-of-work Americans have been without a job for at least a year.
Even economists who predict overall strength say the housing situation could get worse.
"Housing is the Achilles' heel of the economy," said Sung Won Sohn, a former Wells Fargo chief economist, who is now a finance professor at California State University Channel Islands. "Housing could very well go into a double dip. The total economy will not, but housing could."
Falling home prices erode the stake homeowners can claim in their homes, making them more vulnerable to default and foreclosure. Homeowner equity dropped two percentage points in the third quarter to 38.8 percent, as Americans saw their grasp on their most valuable asset slipping, according to Federal Reserve data released last week.
"The job market and the housing market at the two biggest headwinds to economic growth in the United States," said Tim Quinlan, an economist at Wells Fargo. "It will take a long, long time before those areas turn around."
Even as the economy improves, the pace isn't quick enough to reduce the unemployment rate, Sohn said. Economists generally say the economy needs to add about 150,000 jobs every month just to keep up with population growth. Last month, the economy added a net of 39,000.
What's more, temporary factors could have juiced the November improvement in LEI. Two of the drivers of the index, the interest rate spread and the money supply, were boosted by government intervention, Quinlan said. The Federal Reserve is currently engaged in a quantitative easing program, in which it buys up to $600 billion in government debt in an effort to lower interest rates and augment the flow of money through the economy.
Quinlan cautioned against ascribing too much importance to "government life support."
An improvement in the housing market might not come until late next year. Aaron Smith, an economist at Moody's Analytics, predicted the market will turn around in second half of 2011. Once that happens, he said, the overall economic recovery will sustain itself.
"We're getting to a point where the recovery reaches escape velocity -- job and spending growth begin reinforcing one another," he said. "That's the stuff economic expansions are made of."William Alden Huffington Post