Posted on Wednesday, January 12, 2011
JPMorgan Chase's senior economist says "the lights are starting to come on" in both the nation's and Florida's economy.
James E. Glassman said the key message for Florida is that while its economy is still struggling, "I personally think that we are closer to the end in Florida because the pace of building is so low, the level of building has come down."
Real estate prices in Florida are, relative to the national average, "lower than we've seen in a long time," he said. "The trends that I see as an economist in Florida tell me that we are on the verge of a new recovery."
Glassman spoke Tuesday to the inaugural South Florida Economic Summit at Miami's Jungle Island, the Greater Miami Chamber of Commerce's half-day series of panel discussions and speeches on the outlook for the region's key industries.
Attended by several hundred prominent local business leaders, newly inaugurated Gov. Rick Scott chose the venue for his first major address in South Florida, outlining his plans to revive the state's economy and create jobs.
Panelists as a whole struck a largely optimistic note at the conference, noting a pickup in key industries ranging from hotel occupancy to international trade.
Chase's Glassman, not to be confused with the conservative economist, author and television pundit James K. Glassman ("Dow 36,000"), said that the fashionable pessimism in economic circles mistakes cyclical and temporary phenomena for structural problems.
"Despite the pessimism that you hear, the markets where we price risk ... are doing something very different. It's not so gloomy. You see this, for example, in the broad measure of the stock market," Glassman said. "The market has recovered. We are within 15 percent of the all-time record high of Oct. 9, 2007."
Real Estate Excesses
Glassman, showing historical charts, illustrated that the U.S. has a long history of ups and downs.
"What we've learned in our history is that we're good at making mistakes," he said. "But we're also good at getting back on our feet."
Those mistakes do have to be fixed, however, and the big one this cycle was the excesses of the real estate market — particularly the inflated valuations reached in 2006.
"There are pessimistic views around that say we still have another 20 percent correction in housing prices to go," Glassman said. "I think it's useful to think about what's been going on relative to what trends have been in the past. The income we earn is the real constraint on how much of a house you can buy, how much of a mortgage you can get. It's not unreasonable to look at income trends and ask yourself, is the housing market rich or cheap?"
Over time, he said, home prices tend to match the trends in income. In the last decade, that relationship went awry as subprime loans allowed people to get loans that far exceeded what their income could support.
"In the past two years, we have been correcting what was by historical standards fairly inflated conditions," Glassman said. "House prices are back to where they normally are relative to our income."
That means the excesses in the housing market have largely corrected, he said.
"Therefore, you would expect to see prices beginning to stabilize and buyers beginning to tiptoe back into the market," Glassman said. "That's exactly what we're seeing."
Builders also have cut back production and the backlog of housing is slowly easing, also helping to stabilize the market, he said.
That stabilization has helped spawn other positive trends, for example an acceleration in business spending for equipment and software.
"Businesses are behaving like there is a future," he said. "If you think the tide is coming back in, this is the stuff you do. Capital spending is an important barometer of how businesses really feel about the future."
Even consumer spending is picking up, he said.
"When you see consumer spending doing something, they usually know something more about the job market than any of us [economists] know and it's usually later that we figure that out," Glassman said. "As businesses spend and consumers spend, they help to create new jobs, which help to create new income. That's what we're expecting to see play out."
Scott: Exploit Advantages
Scott also focused on job creation, saying the state has to exploit several advantages to grow jobs and compete not just on the national but the international stage.
"We don't have an income tax, we're a right-to-work state, we're the No. 1 place where people want to travel … and to live," Scott said. "We have the expansion of the economies of Central and South America and the expansion of the Panama Canal. With all of those inherent advantages, now we just have to make sure we run our governments in a logical manner."
As he seeks to deliver on his campaign promise to turn the economy around and create 700,000 jobs over seven years, he said a key component of his strategy will be keeping state government accountable.
With that in mind, Scott's administration is targeting regulations, eliminating those that he said are burdensome and reduce competition. Although his administration faces a $3.5 billion budget deficit, "We have enough money. We've got to make sure we don't waste a dollar. We're going to use accountability budgeting and go through every agency to make sure we don't waste any money."
An educated work force is his other priority, he said, noting that the state cannot sustain economic growth without it.
"We're competing against other states, and we're also competing now against other countries," Scott said. "Twenty years ago people didn't feel comfortable putting their money into Brazil or Panama or China or India; now they do. So we're not only competing with 49 other states but with other countries for investment."
Above all, Scott said, Florida should be "the No. 1 job creator."
By Wayne Tompkins, DAILY BUSINESS REVIEW