Growth thoughts

As bad as the current recession has been, to some extent the reaction to certain events, or maybe I should say the over-reaction, was worse than the actual event itself.

The initiation of the recession was to some extent initiated (not caused) by two specific events. The first of these was when housing prices got so high that even with amazingly easy credit, buyers were no longer available. Part of this was related to the overbuilding in many parts of the country to take advantage of what seemed like the ever increasing real estate bubble.

The second event was the oil shock of 2008. It is very hard to see any real reason for the rapid run-up in oil and gasoline prices we had at that time except for speculation. However, the increase in gasoline and other oil related prices diverted a significant amount of spending away from other items at the same time that companies were seeing costs increasing.

When housing prices actually started to decline, and we lost the spending related to home equity loans as well as the loss in consumption due to high energy costs, the economy had to correct. Of course we all learned that the financial community had made extremely foolish decisions based on erroneous assumptions and lets face it, outright greed, that required a robust housing market.

When the housing market slowed and then declined, jobs were lost, sub prime mortgages were defaulted, and all of a sudden many billions of securitized debt lost significant value. The dramatic events that followed are fairly well known and the financial turmoil exacerbated the recession that might otherwise have been fairly mild.

Now as the recession comes to an end, we see housing has fallen to levels that are probably lower than they should be. However, we still have an oversupply of housing in some areas, the big four (California, Nevada, Florida and Arizona) that will keep those prices depressed for quite a while. However, in other parts of the country we should see price appreciation. Further, energy prices are likely going to stay near current levels, since more fuel efficient vehicles and other energy saving options and alternative fuels will keep downward price pressure on oil.

So, we need something to ignite job growth. I believe we may already have the ignition between the stimulus and the return of the consumer. Since in reaction to the "panic of 2008" we saw companies slash costs and reduce inventories, we are now going to see an uptick as some hiring will take place in manufacturing and retail. I also believe that the alternative and renewable energy fields will increase employment as well as the jobs related to the stimulus.

Increased employment, will mean increased need for housing and some price appreciation, at least in most of the country. That is the seeds for a sustained recovery and one that may start to heat up fairly soon. However, I don't think inflation will be a problem in the near term, especially as the imports of oil decrease and improve our balance of payments. A slightly weaker dollar internationally, will cause imports to be more expensive and improve our export capability. However, weaker demand for many of these products will force prices to stay low as efficiencies will be required to remain competitive.