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Chance of optimism: how the housing market and the industry bring the USA out of crisis

Thursday, 18 December 2014 13:57


Six years of the overestimated expectations concerning the American economy, seemingly, came to an end. The USA had a chance of stable growth

I’ve been skeptical about forecasts of acceleration of rates of economic growth of the USA for already six years. Where most of experts and officials noticed green sprouts, I saw the strong head winds promising economic recession, and only then very slow restoration.

But optimism in forecasts for 2014, in my opinion, is more justified. Though the American economy in the coming year will meet serious risks, there are good chances that growth will be significantly stronger, than ever after the beginning of recession.

At the end of summer in 2007 when the economy was still growing, I said at annual conference of FRS in Jackson-Hole about serious risks, that housing prices started falling in the summer in 2006 from dangerously high levels and it threatens with crash of construction branch and to losses in the cost of houses. Decrease in welfare of house owners will bring, in turn, to reduction of consumer expenses and GDP falling down. I also emphasized that the financial markets were incapable to carry out the functions. Banks and other financial institutions ceased to understand the cost of assets not only belonging to them, but also belonging to potential contractors. Therefore financial institutions credited each other reluctantly, and the economy can't grow in such conditions.

Moreover, I warned that FRS is too self-satisfied and it should sharply reduce a rate which at that time made slightly more than 5%. The economy reached the peak some months later, and FRS began intensive decrease in 2008. Elimination of anomalies in the financial markets and low interest rates really caused economic recovery in the summer of 2009. Many participants of the market began to wait for usual fast restoration after recession. I warned that growth will be much smaller, than it was expected: unlike the previous business cycles the recession which began at the end of 2007 wasn't caused by high interest rates therefore decrease of a rate couldn't be of great importance.

The new administration of Barack Obama acted with the three-year tax package intended for stimulation of cumulative demand. Representatives of administration and many others predicted that the financial incentive will cause growth of economy. But this tax package was too small to eliminate production falling. The most part of "incentive" went to increase in expenses of administrations of states which should be financed in other ways. As a result the taken measures increased rather a national debt, than GDP.

When the regulator saw, how weak an economic recovery was, the "nonconventional monetary policy" combining large-scale purchases of long-term securities with promises to hold short-term rates of federal funds very low, throughout the long period of time was started. The purpose consisted in encouragement of portfolio investors to take shares and other assets to make the increase in their price lead to growth of a condition of households and consumer expenses. It was expected that lower long-term rates will also reduce the cost of a mortgage loan.

And again FRS was too optimistical expecting that such policy stimulates GDP growth.

Despite falling of long-term interest rates, housing prices reached a bottom only in 2012, and the stock market grew not quicker, than the income of corporations till 2013.

Thus, the economy limped with growth of real GDP no more than 2% from year to year. Employment grew more slowly, than the population, annual growth of the real wage were averaged by only 1%.

Fortunately, the forecast can change for the better now. Real GDP growth reached 4,1% in the third quarter of 2013, also growth in the fourth quarter was rather fast. Rise is caused by a sharp increase in prices for new housing and industrial production. From September 2012 to September 2013 real welfare of households grew by $6 trillion. It promises increase in consumer expenses, at least households with higher income in 2014.

There are, of course, considerable risks for economy. Nearly a half of GDP growth in the third quarter of 2013 was explained by accumulation of production stocks, and final sales grew only by 2,5%. The possibility of increase of corporate taxes, especially disturbs companies, if the Republican Party loses the majority in the House of Representatives. Though the budgetary deficiencies temporarily decreased, the combination of aging of the population and high future interest rates will lead to that by the end of decade the national debt will grow quicker than GDP. Stock markets and bonds won't be able to react complacently to withdrawal of FRS from policy of quantitative mitigation.

So there are a lot more reasons for concern about. But this year the USA has a chance to reach the highest growth rates since the beginning of crisis. 

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