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US 2011: Housing and unemployment risks
January 25, 2011, Tuesday
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EDITOR'S note:
This is the second of four articles in Wharton Business School's analysis of the global economy in 2011.
IN the US, "the threat of a double dip recession has passed," says Wharton finance professor Richard Marston. The congressional compromise to extend the Bush-era tax cuts for two years should help the country's recovery, he predicts.
"With the added stimulus of the tax bill, we will have continued growth in 2011."
Still, "there are some very severe downside risks," says Wharton finance professor Franklin Allen. One main concern is housing: Allen, Marston and other experts agree that the uncertain housing market will continue to be a drag on the economy.
"In the housing market, the data is going in different directions," Wharton real estate professor Susan M. Wachter notes. Some reports show sales picking up, while others show prices continuing to stagnate. "The bottom line is that we're bouncing along the bottom ... We're likely to be in a holding pattern."
Fortunately, Wachter says, the weak housing market probably will not do too much additional damage to the economy, as most of the harm has already been done. New-home construction is not likely to go lower, for example.
Another problem, Wachter notes, is the recent rise in mortgage rates, which increases payments, makes homes less affordable and undermines sales. In addition, high unemployment reduces the number of potential buyers, she adds.
"The unemployment situation is still not good, and that's going to take a long time to change," Allen agrees. "There's been some upturn in consumer spending, but until things start looking better on the housing and unemployment fronts, I think consumer spending won't drive things forward."
While many US retailers reported a good holiday season, it is not certain that consumers, who are the most important force in the economy, will continue to reverse the tight-fisted habits developed in the past few years, Allen says. Whether they have really loosened their purse strings or did so only for the holidays is unclear.
Ripple effects
US economic growth also could be hampered by ripple effects from the continuing debt problems in a number of European countries, Allen notes.
According to Marston, state and local governments in the US face a debt crisis similar to those in Europe. "For a long time, government workers have piled up benefits that were not properly accounted for," he says. "This is as true in New Jersey as in Greece. With an economy not growing as rapidly as in the past, tax receipts are falling short. How this will play out in the case of state and local governments will be interesting. I think it's the main risk facing markets - that they will be spooked by a default, or near default, here or there."
Allen is also concerned that the US still does not have a long-term plan for dealing with its enormous federal budget deficit. "Until we have a plan, that's potentially a huge problem," he says.
The US covers its deficit by selling government bonds, especially to China. Eventually, investors' recognition that this cannot continue indefinitely will cause bond prices to fall, driving up interest rates in the US and other countries, and undermining economic growth, Allen predicts.
"I think long-term interest rates will start going up, and then the dollar will start going down, and then inflation will start going up. The timing of all those moves will be very hard to predict."
Though the economy could continue to struggle, the stock market, which did well in 2009 and 2010, may continue to benefit from rising corporate profits, Allen notes. But he warns that earnings gains are largely due to cuts in labor that feed the high unemployment rate. "This is bad news for the economy as a whole."
(Reproduced with permission from China Kowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
This is the second of four articles in Wharton Business School's analysis of the global economy in 2011.
IN the US, "the threat of a double dip recession has passed," says Wharton finance professor Richard Marston. The congressional compromise to extend the Bush-era tax cuts for two years should help the country's recovery, he predicts.
"With the added stimulus of the tax bill, we will have continued growth in 2011."
Still, "there are some very severe downside risks," says Wharton finance professor Franklin Allen. One main concern is housing: Allen, Marston and other experts agree that the uncertain housing market will continue to be a drag on the economy.
"In the housing market, the data is going in different directions," Wharton real estate professor Susan M. Wachter notes. Some reports show sales picking up, while others show prices continuing to stagnate. "The bottom line is that we're bouncing along the bottom ... We're likely to be in a holding pattern."
Fortunately, Wachter says, the weak housing market probably will not do too much additional damage to the economy, as most of the harm has already been done. New-home construction is not likely to go lower, for example.
Another problem, Wachter notes, is the recent rise in mortgage rates, which increases payments, makes homes less affordable and undermines sales. In addition, high unemployment reduces the number of potential buyers, she adds.
"The unemployment situation is still not good, and that's going to take a long time to change," Allen agrees. "There's been some upturn in consumer spending, but until things start looking better on the housing and unemployment fronts, I think consumer spending won't drive things forward."
While many US retailers reported a good holiday season, it is not certain that consumers, who are the most important force in the economy, will continue to reverse the tight-fisted habits developed in the past few years, Allen says. Whether they have really loosened their purse strings or did so only for the holidays is unclear.
Ripple effects
US economic growth also could be hampered by ripple effects from the continuing debt problems in a number of European countries, Allen notes.
According to Marston, state and local governments in the US face a debt crisis similar to those in Europe. "For a long time, government workers have piled up benefits that were not properly accounted for," he says. "This is as true in New Jersey as in Greece. With an economy not growing as rapidly as in the past, tax receipts are falling short. How this will play out in the case of state and local governments will be interesting. I think it's the main risk facing markets - that they will be spooked by a default, or near default, here or there."
Allen is also concerned that the US still does not have a long-term plan for dealing with its enormous federal budget deficit. "Until we have a plan, that's potentially a huge problem," he says.
The US covers its deficit by selling government bonds, especially to China. Eventually, investors' recognition that this cannot continue indefinitely will cause bond prices to fall, driving up interest rates in the US and other countries, and undermining economic growth, Allen predicts.
"I think long-term interest rates will start going up, and then the dollar will start going down, and then inflation will start going up. The timing of all those moves will be very hard to predict."
Though the economy could continue to struggle, the stock market, which did well in 2009 and 2010, may continue to benefit from rising corporate profits, Allen notes. But he warns that earnings gains are largely due to cuts in labor that feed the high unemployment rate. "This is bad news for the economy as a whole."
(Reproduced with permission from China Kowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
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