It's Obama's Economy Now

June 19, 2009 Edition, Volume III


Inside Signature Update

- It’s Obama’s Economy Now
- Mixed News from the Housing Market


It’s Obama’s Economy Now

One of the difficult byproducts of the Obama administration’s aggressive approach to curtailing the impact of the recent recession is that some 52% of voters now see the current economic malaise as Obama’s responsibility; with 38% expressing disapproval of his handling of the economy. While there is no evidence that these same voters have forgotten the root causes of the housing/credit crisis and recession, assuming they understood it in the first place, they are now willing to allow President Obama and his advisors to share in the blame. Rightly so, given the extraordinary measures taken and the administration’s continual push to spend, exert capital control and regulate its way to a solution.

On one of the Sunday morning news programs Vice President Biden admitted that the administration had not gotten the $800 billion stimulus plan right; a sobering realization coming from one charged with seeing to it that the plan is carried out and monitoring its benefit to the nation. Though he repeatedly attempted to point out the administration’s saving of some 150,000 jobs, a number that is virtually impossible to substantiate, he readily agreed that the economy is headed towards recovery in spite of the fact that only a small portion of the stimulus dollars have made their way into the economy.

Business leaders and consumers alike have expressed ongoing concern over a potentially threatening increase in the rate of inflation due to expanded monetary policy from the Federal Reserve and US Treasury, and extraordinary budget deficits being forwarded by the current administration and US Congress. Recent talk of a trillion dollars or more that may be committed to an overhaul of the medical system have only made matters worse. But just what must occur in order for inflation to rear its head and how likely is it that there are strategies the Federal Reserve can employ to moderate its effects?

The May Consumer Price Index (CPI) Report released earlier this week extended the run of lower pricing for consumer goods with a 12 month decrease of 1.3%. Though May posted a month-over-month increase in consumer prices of .2%, the year-over-year trend has been a steady decrease, largely due to same period declines in energy costs. Hardly a precursor to spiraling inflation.

Conventional wisdom would suggest that expanded monetary supply must lead to inflation, but it may not be that clear cut. Last summer, as fuel prices were skyrocketing, the risk of inflation was one of the most pressing on the minds of most consumers and policy makers. At the time, I argued that inflation was unlikely in the face of rising unemployment and that a far more likely scenario to be played out would be a decrease in demand sufficient to drive commodity prices lower rather than extend their movement in to a net inflation gain.

In most cases, real inflation can only exist in the face of increased demand, typically driven as discretionary, or excess income works its way through the market. Increasing levels of unemployment most often decrease the flow of funds and make inflated pricing almost impossible to attain, well enough maintain. Higher interest rates have the same effect as they absorb excess income; keeping prices lower. As we’ve worked our way through the recession and now recognize the emergence of modest recovery trends, we continue to deal with the lingering effect of unemployment. In addition, interest rates have begun to rise in spite of Fed efforts to keep them at extremely low levels; Treasury auctions have revealed an investor mandate for higher rates on government securities; a trend which has already begun to work its way through the rest of the market’s capital and credit structure.

Supposing that this trend continues, and that future gains in the employment market may be balanced by increasing interest rates in absorbing available income, whether supported by federal policy or market activity, it will be difficult for inflation to take hold. If the Federal Reserve sees inflation as a likely impediment to economic stability, they will step in and tighten the money supply to curb its pressures – it is their most important and enduring mandate.

Finally, we have the consistent reality that the more something is discussed at the office water cooler, expounded on by extreme theorists, or presented as a certainty by popular pundits, the less likely it is to become fact. For all of these reasons, and more, we’re not advocating extreme measures to defend ourselves against the ravages of inflation; rather, we continue to call for reason, prudence and cautious optimism as we look towards a full scale economic recovery in 2010. Mr. Obama will be as fortunate to own that phenomenon as he is unfortunate to own the current state of affairs.



Mixed News from the Housing Market

This week’s reports from the housing market, though overtly positive for the residential construction industry, offer a mixed bag for the residential real estate market as a whole. New construction permits increased 4% in May over April 2009, though still behind May 2008 by 47%, and new housing starts increased 17% to 532,000 units, though still lagging May 2008 by 45%. Without question, this data reflects some much needed relief for those companies and individuals who depend on residential construction for their support, some 4,000,000 Americans as of January 2008, but it also spells an elongation of one of the continuing problems in the housing market: excess inventory.

The increase in residential permits and construction starts is a direct response to lower mortgage rates and pent up demand for custom homes or ‘consumer preferables’. Though rates have begun to trend higher in recent weeks and lender qualification policies remain stringent, buyers have slowly begun their return to the market. Regardless of inventory levels, interest rates, and lending policies, a certain portion of the population remains interested in newly constructed, customized housing product, the demand for which will always push beyond constraints.

Aside from the cost and availability of credit, one of the more lasting problems plaguing the housing market is the excess inventory brought about by speculation and over building. In the long term, one of the healthier scenarios for real estate valuations would be a continued decrease in new housing permits and starts. While this would continue to disadvantage home builders and their employees, it would allow for a more timely decline in inventory levels and help stabilize residential real estate prices.

This explains why the US stock markets offered little response to what many saw as good news. It is good news, of a sort, but is offset by nagging concerns over how long it may take for residential price stability to return to the markets.









Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC