QUERETARO, Mexico, Dec. 31 (UPI) -- A New Year dawns and, with it, hope rises. The U.S. stock market has had two bad years, the U.S. economy one. Recovery in 2002: yes or no?
Christmas is a time of belief and Christmas week has fortified those who believe in swift recovery for the U.S. economy.
The private research group, the Conference Board, released Friday its Consumer Confidence Index for December. After three months of deep declines the index rebounded in December to 93.7, up from 84.9 in November. The Expectations Index leaped, from 77.3 to 91.5. Suddenly Americans feel much more optimistic about economic prospects.
"The deterioration in current economic conditions appears to be reaching a plateau, led by a stabilizing employment scenario," says Lynn Franco, Director of The Conference Board's Consumer Research Center. "Consumers' short-term optimism is no longer at recession levels, and the upward trend signals that the economy may be close to bottoming out and that a rebound by mid-2002 is likely."
So we have one vote, from the Conference Board, for a swift recovery.
Data on the housing market Friday also looked optimistic. The U.S. Commerce Department reported that new-home sales in November recorded their largest increase in almost a year, soaring 6.4 percent to a seasonally adjusted annual rate of 934,000, the highest level since March.
Meanwhile the National Association of Realtors reported that existing-home sales increased by 0.6 percent from October to a seasonally adjusted annual rate of 5.21 million units in November. David Lereah, the NAR's chief economist, said, "Existing-home sales have been consistently stronger than expected this year, and we're so close to setting a new record [for annual sales] that we really won't know until the December data is available. What's more, we're looking for another strong performance in 2002," he said.
Lereah also spelled out why the housing market can go from boom to boom. For him the economy is good. "Despite the recession, all the major factors necessary for a strong housing market -- low interest rates, strong household formation and relatively low unemployment -- are continuing to create favorable market conditions."
So we have a second vote, from the NAR, for swift economic recovery.
Other numbers last week also brought renewed hope. There were 392,000 fresh claims for unemployment benefit in the week ending December 22, below the rates of between 400,000 and 500,000 that have been typical in the fourth quarter. And while durable goods orders fell by 4.8 percent in November compared with October, they rose by 1.1 percent if the volatile transportation sector is excluded, and by 2.7 percent if the also volatile defense sector is excluded. This was the second successive month in which durable goods orders have shown signs of rebounding--though, of course, from the very weak, terrorist-afflicted month of September.
According to the Mortgage Bankers Association of America, recovery is near-at-hand: "Our forecasts for the past two months have anticipated a return to economic growth in the first quarter of next year [2002], and our confidence in that forecast has grown as evidence of a bounce back from the September declines has come in."
This, then, is a third vote for swift recovery.
But are these commentators right?
The banker's association economics commentary is straightforward and conventional. The MBA writes that "The recovery in 2002 will be strengthened by a sharp turn in fiscal policy that began with the tax cut passed at midyear 2001 and was accelerated by responses to the threat of terrorism... Monetary policy has also laid the base for financing a recovery: the monetary aggregates are growing rapidly." In other words, with fiscal and monetary policy both stimulatory, the economy must bounce back.
The faith in fiscal and monetary stimulus explains why the prevailing mood as 2002 opens may be bright. What also helps, as we reported above, is that some of the pre-Christmas indicators were encouraging; from the nadir of Sept. 11, there has been a recovery. The stock market is likely to begin the New Year in buoyant mood, just as it did in 2001. But the January rally may prove just as reliable as it did a year ago.
What must be taken into account is that this recession is an exceptional one. It did not begin with inflation and higher interest rates but with the bursting, in the first quarter of 2000, of a stock market bubble that had blown up over a period of five years. Rising share and house prices provided much of the gas that that fueled the fast-moving U.S. economy in the second half of the 1990s. Real estate prices are now at record highs. Stock prices have fallen but still have extraordinarily high valuations.
In the late 1990s the wealth effect reigned. Now its heir is a negative wealth effect. Asset prices cannot balloon forever. They rose too fast in the 1990s and their influence on the rest of the economy was too great. The United States enjoyed a consumer boom, saved little and racked up debt. At some time the bill must be paid. Inflation of asset prices cannot pay for everything.
Other data released by the Conference Board points to why the U.S. economy may sink lower before it rises again. The Conference Board's Help-Wanted Advertising Index dropped to 45 in November, down from 46 in October and 75 in November 2000.
According to one of the Conference Board's Economists, Ken Goldstein, "The overall level of the Help-Wanted Index is as low now as it has been in almost four decades." With unemployment rising, Americans are finally going to rein in spending and save more.
It is not by coincidence that the Federal Reserve has also dropped its short-term interest rate, the Fed Funds rate, to a 40-year low. After the bubble of the 1990s, we have the bust. The Federal Reserve and President George W. Bush see the danger of slump. They are resorting to very strong fiscal and monetary stimulus to prevent it. Yet recovery is far from assured in 2002. The U.S. economy may need to struggle on weakly for a couple of years before it puts behind it the excesses of the late 1990s.
(Comments to [email protected])
