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Today the Bloomberg index of financial conditions moved into positive territory for the first time since July 2007. This ranks as one of the best indicators of a V-shaped recovery that I've seen. The financial markets have largely healed, and that is a precondition for healing to spread and normalcy to return to the rest of the economy. This is very supportive of an optimistic outlook for growth next year.
HT: Mark Perry, who has a more detailed chart of this index over the past two years.
5 comments:
Scott,
Any concern about the new home sales data? Is that part of your commentary that housing is in a U shaped recovery and it will just take longer to improve. I am concerned about what happens when the home buyer credit runs out next year.
New home sales are less than 10% of existing home sales. New home sales are roughly tracking housing starts, and both have been very depressed in recent years, and both look like they are bottoming in U-fashion. Residential construction is a very small (2.5%) part of the economy at this point, so when sales go up or down by 10% is not going to make much of a difference to the overall economy. I'm much more impressed by the huge rebound in existing home sales, and by the fact that prices of new and existing homes appear to have bottomed. As with most government subsidies, the homebuyer credit is a waste of taxpayers' money.
Scott,
As new home construction is down 80% from peak and tracking at levels not seen in decades when our population was much smaller....
what are your thoughts on people like Calculated Risk who opine that existing home sales really have little impact on the economy as relatively few resources are applied to an existing home sale vs a new home sale that has incorporated the purchase of materials, development of land, and the employment of labor along the whole supply chain and building process?
Taking the existing home argument to an extreme....if much of the existing home sales was simply liquidating foreclosed homes for very low prices.....the impact on the economy would be minimal.....and actually could be viewed as a negative if we were contemplating the sale of blighted or very distressed homes in places like Detroit or many areas in Ohio, Indiana, Michigan, Illinois, Florida, Pennsylvania etc.....
It really is amazing when you are looking at things on the margin how different people can come to such differentt conclusions on the exact same issue once you look a little beyond the margin.
alstry: new home construction is indeed very low. But as the population grows, there will sooner or later be a shortage of housing in the economy, and construction will have to rise by leaps and bounds. What looks awful today is virtually guaranteed to look better tomorrow.
Existing home sales don't add anything to GDP, but by rising strongly they tells us that housing prices have reached a level that allows the market to clear. Housing is once again a liquid and relatively stable market. That in turn means that the value of mortgage-backed securities can stop falling, and that in turn restores confidence and stability to the banking system and to household balance sheets. It's a very important development.
I think I've said this before, but the day you turn optimistic I'm going to start getting nervous.
Scott,
Let's remember that the pessimists are like broken clocks; right at least twice a day.
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