johnnymk

http://www.industryweek.com/ReadArti...rticleID=13862


March 29, 2007 -- An historical comparison to the U.S. economy in the late 1990s shows that the country's troubles may just be beginning, says Daniel C. North, chief economist at accounts receivable management service provider Euler Hermes ACI.


"The stock market and housing market bubbles, and their demises, show unsettling parallels," said North on March 27. "The stock market bubble, which the Fed burst in 2000, caused significant disruption and sent the economy into contraction for three years. The housing market bubble, which the Fed burst just a few months ago, shows all of the same characteristics, including strong evidence already that an economic contraction is upon us. If history is any guide, it is likely to get worse."


North demonstrated five steps that both incidents have had in common:

Step 1: The Fed held monetary policy steady for some time before it started raising the Federal Funds interest rate to slow the economy and quell incipient inflation

Step 2: The asset market continued its rapid ascent.

Step 3: The Fed continued to raise the Fed Funds rate.

Step 4: The market bubble popped and deflated, and the assets rapidly started to lose value.

Step 5: For the stock market bubble, the economy quickly started to contract. For the housing market bubble, we are only beginning to see what is going to happen.



"To date, the housing market bubble has behaved exactly as the stock market bubble did in Steps 1 through 4," North commented. "If the housing market bubble continues on the stock market bubble's path into Step 5, we would expect to see conditions such as slowing GDP and job growth, as well as other negative indicators." Those expectations have already been met, he said, as job growth has been below the non-recessionary average for six of the past seven months. Additionally, GDP growth has been above the long-term average of 3.5% only twice in 10 quarters, and the last three quarters of 2006 were especially weak at 2.6%, 2.0%, and 2.2%.


Investors' fears regarding the housing slowdown's effect on consumer spending are valid, North said. "As of January 2007, asset value equivalent to 15% of GDP has disappeared from the housing market, significantly more than the 3.4% lost at this stage of the stock market bubble. This fall in value will not only cause defaults to rise and credit conditions to deteriorate, but it also will destroy some of the equity built in the past few years, equity that has fueled consumer spending.


"The consumer accounts for two-thirds of all economic activity, so a faltering consumer will surely lead to a faltering economy. On a more intuitive level, asset value equivalent to 15% of GDP simply cannot disappear without significantly affecting the economy," North added.


One other economic predictor is the U.S. Treasury yield curve, which remains inverted, "a condition that has been a perfect predictor of recessions for more than 30 years," said North. "The yield curve has been inverted for nine months and it seems unlikely to turn positive anytime soon. Simply put, the evidence is abundant that the slowdown that occurred in Step 5 of the stock market bubble is being repeated here."

cheapie

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johnnymk

Oh well, many economists predicted the collapse of the stock market in 1999 and early 2000.

A couple of years ago, the bursting of the housing bubble was predicted.

Same response.

cheapie

yeah. not saying it's not true. just depressing. that's one reason i've stayed in a small house and, instead of spending my bonus on a fun toy like a boat, i'm putting it in savings. in the hopefully unlikely event that i'm effected by a downturn, i won't be overextended like many others.

ray

I've really wanted to buy a place here in Los Angeles the past 3 years, and was this | | close to buying one but decided that my money was better off sitting in a mutual fund or savings account until the "bubble" burst with the housing market. It's unfortunate that we're seeing these swings in the economy, but things are just taking its natural course.

johnnymk

It's always best to spend within your means. You will be rewarded for it.

I wish I could be optimistic for the economy. But every time I read something, i.e. the federal deficit, jobs lost to China, ever mounting inflation, etc, it is very hard to be that way.

Prngr44

Being responsible just isn't as much fun.

YellowCoffee

I've had this same feeling of concern for the past 2 years or so (even with the strength in the stock market). It's a bit discouraging being relatively young and having to start your financial path in uncertain and volatile times like these, but I guess there's always going to be ups and downs in financial markets. I do feel however that China's stake in the dollar will have a significant effect on inflation rates here in the US.

I'm doing a pretty decent job spending within my means so hopefully it will be worth it.

zippyjuan

My own outlook is for flat to very slow growth. The housing bubble has not truely collapsed. There is some shakeout on people and lenders that over extended, but so far that is a small part of the total housing market. Defaults, while rising, are still below normal in most areas. Homes are still selling, just not as fast. If we get involved in Iran, then gas prices could go crazy and that would put a pretty good damper on the economy.

I would suggest to anybody that does not to have enough money stashed in a fairly liquid place to cover their living expenses for several months in case something happened to them and they were unable to work for whatever reason.

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renovation

im a bundle of bad news to .
i travel a lot and im seeing it first hand from one state to the next .home prices are falling due to lap luster home sales . its taking time and its not a major drop in a lot of markets .but homes are coming down in price and taking a lot longer then 60 days to be sold . in my home state .its 1 year on avg. now to sell a home and thats with mass prices drops in the price .also sellers are picking up all the sale costs .for the buyers .its a buyers market if you want to take a gamble it will return to normal in a given time frame .
im in florida today looking at homes as i write this and im still going to hold off till the prices come down 3-5% more they are dropping do and have as much as 10% in the last 12 months .and condos here are slowed to 50% in there sales market . but the prices have not drop as much as new/used homes sales.

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InfiniteNothing

Hot!

VTGreg

It may just be a blip but housing sales were up in the month of February.

http://money.cnn.com/2007/04/03/news...ion=2007040311

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brainsmile

Stock market isn't so bad lately

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"Nobody beats Vitus Gerulaitis 18 times in a row." - Vitus Gerulaitis on beating Jimmy Connors after 17 failed attempts.

Prngr44

I wonder what percentage of the "pending" sales will complete? They're not even sold yet and people get giddy.

They're pending for a reason.... financing!