Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, 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 a context of price stability.
Let's look at this statement in more detail.
Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
Real personal consumption expenditures have been increasing. But
Unemployment is still high (although it appears to be topping out) and
Real disposable personal income is still weak.
I'm not sure I agree with the Fed's complete assessment of household wealth.
While housing wealth decreased in 4Q09
Wealth from financial assets increased leading to
An increase in household wealth.
In general, I think the biggest issue constraining further expansion of spending is the jobs market.
The Fed continued:
Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.
Equipment and software investment rebounded nicely last quarter.
Non-residential fixed investment rebounded a bit, bit realistically won't be a major player in the expansion for some time.
Housing starts are still very depressed and
Employers aren't adding jobs yet.
Finally,
Bank credit topped at the beginning of 2009 and has yet to expand. But interest rates are still very low.
2 comments:
I think you are right that it really boils down to jobs. The "structural" problems such as foreclosures, bank solvency, consumer spending and even the deficit all become much more manageable if people get their jobs back. The positive side is that the jobs losses have really are focused in construction and auto manufacturing. And if you look at your housing starts chart, it shows that the US spent a good 3 years building homes above the 1.4/1.5mn needed for household formation. But we have spent the last 3 years way below the historical formation level. Since 1994 I see house starts about equal to household formation. I don't think the excess supply is really as bad as everyone thinks. And that is why existing inventory is clearing a lot faster than expected. I'd bet that within 6-12 months housing starts come back and trigger significant jobs progress.
All of this, and more, just screams "inflection point" to me: The economy has clearly plateaued, but I am not convinced it's a bottom.
The Shadow Housing Inventory and CRE Bubble are dire threats to blow up the whole damn thing. Throw in the real possibility of a deflationary spiral and the irresistable political pressure to rein in government spending, and I am not optimistic at all about sustaining this recovery.
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