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“Some Forecasters See A Fast Economic Recovery”

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That’s the headline in the New York Times, and many voices in the article echo what Brian Wesbury, chief economist of First Trust Portfolios has been saying on my program since November: It is a nasty recession, but this is the end of the standard business cycle and recovery will begin in 2009, perhaps even in the first half of 2009.

The world, in short, isn’t ending, and markets and home prices will recover. Key graphs:

But the economy will no longer be contracting, and the recession that started in December 2007 will end at 18 or 21 months of age. The previous record holders, severe recessions in the mid-1970s and early 1980s, each lasted 16 months.

“I think that consumers are certainly in a state of shock right now, but their behavior is fundamentally rational,” said Martin Regalia, chief economist at the United States Chamber of Commerce. “They want to work, they want to make money and they want to spend that money. Above all they are resilient. They lick their wounds and with some help from government, they start back again and we come out of this quickly.”

A key to the revival, in every forecast, is home construction and home prices. The latter are still falling, at an even faster pace, adjusted for inflation, than in the Great Depression, according to the S.& P./Case-Shiller Home Price Indices.

That has the knock-on effect of multiplying foreclosures and trapping millions of people in homes that are worth less than their outstanding mortgages. Such circumstances inevitably depress spending and business investment.

But housing will probably bottom out by spring, many forecasters now argue. The Federal Reserve will play a role in making this happen by buying mortgage-backed securities and, in doing so, lowering the rate on 30-year mortgages to less than 5 percent, which is roughly the present level. That will encourage not only home buying, but also refinancing.

The Washington Post reports on the downside of the upside, which is the huge increase in the national debt that will follow the massive stimulus package that will pass in short order. The job of the GOP in these times is to assure as much as possible that the spending goes to genuionely productive undertakings that will promote long-term growth and to carve out the giveaways to special interests. As much tax relief as can be had should be gotten.

Next week’s meeting between the president-elect and GOP Senate and House Leaders McConnell and Boehner will signal whether the new president intends to govern domestically from the center or from the left. If the former, the stimulus package will include some crucial tax cuts to encourage business investment and home building.

Fingers crossed….


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