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.

[Simon N.]

~~~

Advertisements

Tagged: , , , , , , , , , , , , , , , , , , , , , , , , ,

§ 8 Responses to Econ Sense: Forecasting the Economy

  • DarcKnyt says:

    I always come away from your posts a little smarter than I was before. Of course, you may as well try to fill the ocean with an eye dropper, but I appreciate the effort. 😉

  • Maybe it is the low interest rates that have got your economy into trouble..if people had saved more , they will at least something to spend when they are out of a job…

    • leafless says:

      But consumption makes up about 70% of the U.S. GDP. If people spend too little, companies will have to reduce production and start laying off even more people to cut costs; savings can only alleviate short-term pains. The problem the U.S. faces is a systemic one. It is not pretty either way.

  • Mr.R says:

    I am not an economic expert but going through the scenario what comes in mind is the man holding a tiger’s tail 😀

  • zmanowner says:

    I thought the recession was caused by sub prime mortgages and bad lending practices..and now there is an excess inventory….hmmmmm…over my head….i will stick to comic books and leave the head work to the economists…zman

    • leafless says:

      The problem is that some economists predicted that home prices will increase to no ends and housing demand won’t ever cease; a lot of people bought a second or third home as an investment. Home builders continued to build new homes even though demand was slowing. This, coupled with rising rate of foreclosures, causes the excess inventory.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

What’s this?

You are currently reading Econ Sense: Forecasting the Economy at Good Morning, Mr. Simon.

meta

%d bloggers like this: