Econ Sense: Forecasting the Economy
July 14, 2009 § 8 Comments
There are two types of economists–the high profile and low profile ones. High-profile economists work for large governmental and academic institutions; they have access to the best data and analytical tools. The Fed chairman Ben Bernanke is a good example. Low-profile economists don’t have access to high quality data; they have to rely mostly on economic theories and common sense to gauge the health of the economy.
People often ask for my opinion as to when the U.S. economy will recover from the current economic malaise. As I am a low-profile economist, I can’t say exactly when the economy will turn around. But I can train people to look for signs of possible economic recovery. When these signs are detected, we would know that the economy has recovered or is very close to a full recovery.
The current economic recession in the U.S. was caused by the housing bubble; the economy won’t fully recover until the housing market has stabilized. Current housing demand, if there’s one, is driven by low home prices and low interest/mortgage rates. This clearly is an anomaly. Low interest rates tend to lead to higher inflation; this should have driven home prices higher and not lower. Unfortunately, bleak employment prospect and investment losses as well as adverse selection in the credit market are causing people to save more and buy less which create an upsurge in housing inventory. Additionally, the U.S. central bank is keeping interest rates artificially low to generate demands.
The housing market will not return to normal conditions unless home prices and interest/mortgage rates part ways. This means that there must be either high home prices and low mortgage rates or low home prices and high mortgage rates. There are numerous other predictors of the economy, but I think this one is the easiest for a non-expert person to grasp.