Are you sick of hearing doom and gloom reports about the economy? Then have a chat with Dana Johnson, the chief economist with Comerica Bank.
“At long last the recession is over,” he says. “My point of view is that the economy has stopped contracting and is poised to begin growing.”
Johnson is optimistic about the economy since the healing that is currently occurring in the housing market will lead to improvements in the credit markets. He also points to declining inventories relative to sales as evidence that companies are making headway in getting rid of their unwanted inventories. Another reason to expect growth is the huge amount of pent-up demand in the marketplace.
“The economy has been given a huge amount of support and encouragement from both monetary and fiscal policies that have been put into place,” says Johnson. “There are widespread signs that the economy is stabilizing and is ready to grow again.”
One of the most reliable indicators that the economy is stabilizing is the decline in unemployment insurance claims.
Smart Business spoke to Johnson about his positive economic outlook and where he sees the housing, credit and job markets going in the future.
What is the source of the economic uptick?
It’s very much a blend of the natural resilience of the economy and the important amount of support that’s been injected into the economy, both by the Fed and the fiscal programs put in place by President Obama.
There’s a natural dynamic in the economy that occurs when you have a long and deep recession. For one, you create the need to cut inventory, and when that process comes to a natural end, the economy gets a boost. Also, the longer a recession lasts and the deeper it gets, the more pent-up demand you create. But besides that, the stimulus package put money in the hands of consumers and created government spending that in turn created demand in the economy.
What does the future hold for the housing market?
We have seen the bottom of the housing market, and now we’re seeing a modest upturn in both home sales and in new building permits and starts. We’re currently operating at a construction pace that’s below what’s needed to match the demands of newly formed households and the demands created by houses that reached their natural usefulness and had to be torn down. Nevertheless, we’ve seen stabilization in home sales and building activity, and we’re beginning to see a much smaller decline in house prices. Over the next three to six months, we’ll see house prices stabilize and the housing price index will show moderate increases.
This is really positive news for the economy, in terms of ending huge declines in household net worth due to declining house prices. This will also create more confidence that financial institutions that have many of these mortgages on their books will be able handle and recoup these losses.
What’s the forecast for the credit market?
I think the credit market will continue to normalize. It’s already made enormous progress, particularly over the last several months. You can see the return of confidence in credit spreads, for example, the one between capital bond rates and similar treasury securities. These rate spreads are still wider than normal, but they’re much narrower than they were three, six or 10 months ago.
We’re also seeing a lot more private companies be able to issue new securities, whether they are common or preferred stocks or bonds. That’s a clear sign that the appetites of investors for private securities are growing again.
We’re not back to normal; credit is still more expensive and until there is a clear upturn lenders will be cautious in extending credit to both businesses and households. But, we’re making tremendous progress and it won’t be long before the credit market completely normalizes.
Do you see the job market getting any better any time soon?
I don’t think we’ll see the unemployment rate hit its peak until around the turn of the year. But, if you look more broadly ahead to the next 12 months, I think we’ll see a 4 percent growth in real GDP and an increase of 1 million jobs. That will still leave jobs well below where they were before the recession, but it will be easier to get a job and the unemployment rate will begin to stabilize. The stability in the labor market lies ahead in the next six months or so.
Are consumer and business capital spending expected to increase any time soon?
I feel that consumer spending will be reasonably strong, probably rising in parallel with incomes. I also think that the savings rate — which has risen by several percentage points over the last couple of quarters — has probably risen about as far as it’s going to.
Business capital spending has been contracting very rapidly and will continue to contract for a little while longer. Companies will be slow to commit to investment projects until they see signs of a pick up in demand. Therefore, capital spending isn’t likely to start growing until next year.
One final note: Even though the economy is going to be on the upswing, inflation will stay very low. The initial recovery still leaves the country with excess capacity and a large amount of slack. Inflation will likely stay low for all of 2009 and 2010.
Dana Johnson is the chief economist with Comerica Bank. Reach him at (214) 462-6839 or [email protected].
