Economic Outlook

Andrew Tobias is starting to sound negative:

Listen. Even leaving aside the continuing costly catastrophe in Iraq, our economy would appear to face at least three broad challenges:

1. This housing thing is not likely to go away in a few months. And it could be a decade or two before homes and condos in some places return to their peak prices (at least in “real” terms, adjusted for inflation). Click here for an example of the pain from Sacramento. As a result, because so much consumer spending depends on home equity debt – and/or the confidence consumers feel with ever rising home values – a recession is likely . . . which would just add to the housing market woes . . . which would just deepen the recession.

2. Global oil production may have peaked; and where a U.S. slowdown might once have triggered a worldwide slowdown, and with it a drop in oil prices, that might not happen this time. China and India and some others are growing so fast – thankfully* – that a U.S. recession might not be enough to push oil prices down. Which means consumers may continue to face high energy costs but also, perhaps, high other costs. Like food. Friday’s Wall Street Journal tells the tale. (“The days of cheap grain are gone," says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern. This year the prices of Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade . . .”)

The demand for corn to make ethanol (a dumb solution to our energy problem, but that’s another column) – combined with the demand from hundreds of millions of Indians and Chinese who are beginning to be able to afford something more than bare subsistence – may take a while to absorb.

In the longer run, technology may provide cheap energy, tremendous fuel efficiency, and even more productive agriculture. But for now, high food, gas, and home heating oil prices won’t make homes any easier to afford. See #1, above.

* I say “thankfully” because strong demand from abroad can mitigate or even forestall our recession . . . and because a rapidly growing young Asian middle class will one day be there looking to buy shares for their retirement accounts that retired Baby Boomers will be looking to sell . . . and because as those giant economies grow more prosperous, the wage gap will begin to shrink . . . and because, well, those two-plus billion people are human beings, too.

We’ve been losing, and will continue to lose, a lot of high-paying jobs. It’s easy to blame the free-traders and greedy capitalists for this, but putting up trade barriers won’t cure the problem. Perhaps the only government intervention that caused more unintended harm than Prohibition, in 1920, was Smoot-Hawley, designed to prevent job losses, in 1930.

Tobias is typically very positive but I think he is pretty much spot on with his concerns and more negative outlook. Globalization I feel won't hurt standard of living in the long term as I think it will eventually not only competition for jobs but more consumers as well with money to spend.

Oil however is going to be tough and why the US should spend money and capital into finding alternatives. Even if we haven't reached peak oil the consumption of oil is justing getting bigger and bigger and I haven't heard anyone talk our increasing ease in finding oil.

Finally, the real estate market fed by easy money from excess liquidity and new fandangled mortgage standards that would make a prostitute blush is really in the short term that will really hurt. Go to a site like Redfin and just see the price increases since 2000 and it becomes quickly clear that we have a bubble and bubble don't end well