The well-known and highly respected publication The Economist, in a recent lead article entitled “Comeback Kid,” was filled with optimism about the U. S. economy and its outlook.
It acknowledged that the economy was in “a fragile state,” but it listed reasons for confidence.
That review cited the housing industry, and it claimed that houses “are among the world’s most undervalued … 19 per cent below fair value.” Also mentioned but later ignored was household debt that reached 133% of household income. Too, foreign trade imbalances have been declining, and manufacturing, notably in the automobile sector, has shown marked improvement.
Not so, to all this, in the opinion of this economist.
Housing affordability has led to the building of increasingly small units, with the result that new house prices have understated price pressures. The price index should be adjusted to units of constant size and also quality.
These indices do not reflect demographic changes that make affordability less relevant: the unusually high weighting of the baby boomers relative to the other segments of the population. They have entered their maximum income years, even though they are becoming less important for resale housing. They already have traded up to their ultimate destination and will start to downsize.
Using incomes of those now buying homes would produce a less comforting affordability ratio. This implies that house prices are more likely to fall than current ratios may suggest. Also, condominium prices and housing in major locations are at outrageous levels.
Although household debt has fallen recently, it remains at a point far above the previous two decades.
The foreign trade imbalance has improved, primarily because the sluggish economy has drawn in less imports while exports have risen as the U.S. dollar makes import prices less onerous. Nevertheless with monthly trade deficits now running at about $45 billion, that leaves little cause for optimism.
The manufacturing sector has been a bright spot, primarily as a result of buoyant automobile sales and production. For two years they slumped badly, but now, with totals of $13 to $14 million annually, they remain far below the $16 million of five years ago. With the average age of cars 11 years, some resurgence was inevitable. Furthermore, new technology manufacturing nowadays requires less large-scale employment, and in any event, sales recently have slowed.
All but forgotten is the fact the United States and parts of Europe are over a fiscal cliff with little prospect of corrective steps due to political gridlock.
Overall, things are somewhat better, but as in the 1930s, a real recovery is not imminent. Once again the media fails to depict reality.