Watching Paint Dry
by Chris Beagle
Nearly six months ago, I wrote about the possibility that history books may look back on April, 2009 as the beginning of the end of the worst financial crisis since the Great Depression.
At the time, the Dow Jones had posted back-to-back monthly gains of over 7.00%, the Standard & Poor's Index had had its best month in nearly a decade, and the Federal Reserve announced it saw signs of the recession easing and that the economic outlook had improved modestly.
But have you ever watched paint dry? It must be quicker than the snails pace recovery weve experienced ever since. Yet cautious optimism abounds among the ranks of leading economists. Most believe that mounting indicators point toward a prolonged and uncertain recovery, unlike most periods of recovery that have proven to be more immediate and definitive.
Nonetheless, in growing numbers, most predict the recession is ending, and many say it already has. The trouble is that despite all the media tells us about the status of the economy, be it good, bad, or otherwise, we still judge it by our own experiences and, for most people, its very difficult to see progress.
Im not sure what conversations are occurring at your dining room table or office water cooler, but it seems that we all know someone who has lost a job, is looking for a new one, is about to close a business, or sell a home. Many Americans, who first worried about having enough money to retire, now worry about having enough money today. Its everywhere, still.
So where do we stand and just what should we expect to see in the months ahead? Heres a look
Arguably the most damaging effect of the recession has been the loss of over eight million jobs. Making matters worse, an estimated 15 million Americans are currently looking for work, but not finding it. Since unemployment is a lagging indicator, and traditionally the last component of the economy to recover, it is widely expected to reach double digits by the end of the year.
With one out of 10 workers not getting a paycheck today, the pace of increased consumer spending, which accounts for 70% of total economic activity, is expected to be slow. Unprecedented debt and trillions of dollars of lost home equity will also continue to stifle spending.
The broadest measure of the U.S. economy is Gross Domestic Product. Since the start of the recession in December of 07, the first quarter of 09 saw the biggest drop yet of GDP by 6.40%, but showed signs of rebounding by falling just 1.0% in the second quarter.
After four consecutive quarters of negative growth, the GDP is widely expected to turn positive by the end of this year. In fact, the National Association of Business Economists recently projected that the GDP will boast a solid gain of nearly 3.00% in the second half of this year.
And while it is a positive that consumer spending jumped in August by the largest amount in nearly eight years, the Commerce Department reports that personal incomes are still lagging, increasing just 0.2%, the same figure as it did in July.
The surge in consumer spending is viewed as a strong signal that the economy was returning to growth this summer, but economists fear that if income growth doesnt improve more substantially, any rebound from the recession could falter. The bottom line is that the economy will not grow if consumers don't spend. Consumers wont spend if they dont have money. And consumers wont have money if they don't have jobs. Without jobs, there is little confidence. The cycle continues.
As for the future, nothing is truly certain. It is terribly complicated and has far reaching effects that trickle to a seemingly endless stream of outcomes. Sadly, there isnt one magical formula to determine exactly when we can all feel confident that this is over. Despite recent improvements, the consensus forecast is that the nations economic recovery will take time and will likely have setbacks along the way.
Despite all the uncertainty, there is a silver lining. The feds remain steadfast in their pledge to continue purchasing mortgage-backed securities in order to keep interest rates low, a promise made earlier this year which has remained intact beyond the initial promise through the third quarter.
Fortunately, this strategy has worked as mortgage rates have remained low. In fact, Freddie Mac reported that 30 year fixed-rate mortgages averaged 4.87% for the week ending October 8th. This is as close as we've been to the record low of 4.78% that occurred in March.
Even more impressive are 15 year fixed-rates. Since records were first tracked for this product in 1994, and for the fourth consecutive week, this product has seen a new record low (4.33%, week ending 10/8).
So if you've been sitting on the fence contemplating a refinance, now is the time to act. Or, if you've been trying to predict the bottom of the market and waiting to buy a second home or investment property, don't regret it later by not taking action when things were as good as they are now. Despite tightened guidelines, lenders are still lending and closings are still happening.
Hindsight is twenty-twenty, so to speak, but looking back six months ago, perhaps the more accurate statement would have been were at the end of the beginning of the end. Only time, mixed with patience and a bit of luck, will tell.
Chris Beagle is a Senior Loan Officer at Fairway Independent Mortgage Corporation. Contact Chris at 302-260-7090.