I was able to attend the “2011 Comerica Bank Economic Forecast Conference“, to try to get a glimpse into the future and see what’s in store for homes in the bay area as well the US economy as a whole.
Panelists were invited to discuss their own views on the US economy and make their predictions, but both had surprisingly similar expectations for what’s to come in 2011. Here’s the short version of the 4 hour conference:
The panelists at the conference were: Dr. Mario Belotti, a tenured economics professor at Santa Clara University, and Rich Karlgaard, the publisher of Forbes Magazine. They were both very optimistic about 2011 … much more so than I was expecting.
Also, surprisingly, they both had very similar forecast for the economy. The Gross Domestic Product (GDP) is one of the key measurements of how an economy is doing, and both predicted GDP to increase 3.5%-4% in 2011 and stronger increases in the following years. Neither expected a significant drop in unemployment numbers in 2011, and both believe that the key things driving the economy will be increased spending by companies with strong balance sheets. They didn’t discuss Bay Area real estate trends, but on a national level they think that real estate prices have stopped their decline and will now slowly recover. Interest rates are expected to increase, but only slightly in 2011, so as to not interfere with the recovery. The stock market forecast for 2011 is 14,000 for the DOW and 1,500 for S&P500.
All the positivity aside, there are several things that could still de-rail this recovery and are important to watch for: Oil prices rising faster and higher than expected, European countries deciding to abandon the Euro, and/or the Fed over-doing their quantitative easing.
Now if you’re interested in the specific details and explanations, here’s the whole story:
Dr. Belotti was the first panelist, and expects:
- 3.5%-4% GDP increase in 2011
- 2-2.5% increase in consumer spending. The feeling of job security is coming back which is increasing consumer confidence.
- Even a tiny 0.5% increase in consumer spending will have a massive positive impact on the economy.
- Throughout the “Great Recession” we lost $12 trillion as a country, but have since regained $7 trillion … the $5 trillion left is slightly from the stock market, but mostly from Real Estate prices that are still down, but are now leveling off.
- Savings rate has increased from 0% in 2006 to 5% today.
- Consumer finances are in much better shape than people think.
- Business profits were high in 2010, so business investment will be equally high in 2011 (which is a standard pattern… the year following high profits, companies typically invest back in their business).
- The amount of $ that corporations have on their balance sheet is the highest since 1957, which makes it easy to increase spending.
- Housing sector is stabilizing. There are another million foreclosures that will happen in 2011, but they will be easily absorbed.
- In the last few months there have been large month over month increases in real estate sale, and December in particular had the largest increase in sometime – 12% higher than November. Prices are the same as last year.
- New housing construction which is down tremendously over the past couple of years is finally forecasted to increase by as much as 20%-30%. Even if these forecasts are optimistic, the important thing is that it’s no longer a decrease, dragging the economy down.
- Higher inflation in 2011 than 2010. CPI of 2.2%, led by food prices, metal prices, etc.
- Interest Rates – Federal fund rate is currently 0%, so the Fed is increasing liquidity by buying medium term securities to keep interest rates down. Fed might stop buying these securities in June if everything goes as predicted, and by the end of the year the federal fund rate will be 0.5%, which means prime will be at 3.5%, 10 yr rate will be at 4.1% (from 3.4% now)… which is still quite good and affordable for most borrowers.
- Unemployment is currently 9.4% and should be about 8.8% by the end of 2011. The main reason we are not going to have a big decrease in unemployment is a multitude of part time workers (currently considered “employed”) that will be converted to full time before new employees are brought in, since it’s more cost effective than hiring new employees. The other big reason is that through the “Great Recession” we continue to increase productivity – partially by working more hours, partially with new technology. Productivity increased 2.2% last year (and keeps increasing about 2% per year).
Next Rich Karlgaard, basically re-confirmed everything Dr. Belotti said, and added the following:
- Even though this recession has felt horrible, in reality our GDP has been very steady throughout the recession so it felt much worse than it really was. The problem was that Aggregate Demand dropped 25% during the recession.
- The American consumer deleveraged over a very short period of time (which is a great thing), so the Aggregate Demand is now below GDP.
- Stock market forecast: 14,000 DOW, 1,500 S&P500 by year end. Revival of IPO market.
- There is still a lot of tax and regulatory uncertainty.
- Oil prices are a big concern. Over $100/barrel is a concern, $120-$130 is a red flag … if oil hits $200 as some experts are suggesting, it will single handedly put the breaks on the economy.
- Bernanke is sewing the seeds for inflation by mistaking gains in tech productivity (which lead to lower pricing) for deflation. So a big concern is the fed staying too long on the path of quantitative easing, which could create inflation.
- European countries in financial crisis might decide to abandon the Euro, which would be a significant impact to the US economy.
Overall, I found the conference to be highly informative, and very optimistic … and I’m looking forward to a great 2011!
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