by Brent Wayne
With the global economy still mired in an economic downturn, there have been a few bright spots in the U.S. economy this year. Unlike Europe which is seeing sustained unemployment above 20% in countries such as Spain and Greece, recently posted numbers in the U.S. show employment is down to 8.1%. While job growth has been anemic since the recovery began, these numbers are significantly better than 2009 and 2010 where unemployment averaged 9.5%. The housing recovery now underway is potentially the biggest catalyst to U.S. economic growth over the near-term.
The 2011 shift in policy by the government to address housing supply and not housing demand, has resulted in a significant decrease in foreclosures. The Home Affordable Refinance Program (HARP), along with the infusion of large private equity firms into the single family home market, have allowed homeowners to stay in their residences and turned thousands of potential vacant properties into rentals. Homeowners who are unable to obtain financing on a mortgage loan that is underwater might be eligible to refinance under HARP. With the presidential election looming, the White House is pushing for an expansion of the program as soon as this week. It is estimated that 11.3 million homes are holding mortgages far beneath their home values. In February, Federal Reserve Chairman Ben Bernanke reiterated to Wall Street the need for institutional investors to come into the foreclosure market and turn vacant homes into rental properties. With rental prices exceeding average monthly mortgage payments in many cities, large private equity firms have seen the viability of long-term investment in the single family home asset class. In his February 2012 interview on CNBC, Warrant Buffett stated that that single family homes had the potential to be a better long-term investment than equities.
While the stock market is not an accurate barometer of the U.S. economy, it does show that the economy is growing, albeit very slowly. As of September 10, the Dow Jones Industrial Index was less than 1,000 points away from its all-time high of 14,164 in October 2007, one year before the 2008 crash. Very little growth in the economy should be considered the catalyst for this rise in market indices. Further, with hedge funds controlling 80% of the daily trading volume on the New York Stock Exchange, it has become a pattern that institutional buyers and sellers are causing some of the market’s gains. The Bureau of Economic Analysis issued its revised GDP numbers in August, showing the United States economy grew at a 1.7 percent annual rate in the second quarter of this year. Continued stimulus by the Federal Reserve has been integral in injecting some life into an economy troubled by high unemployment and weak job growth. The Fed will most likely continue quantitative easing, or QE3, and buy a third round of bonds in an effort to drive down the cost of borrowing, providing companies with capital to grow. Economists cite the recent weak jobs report and the sustained unemployment rate above 8% as key factors in this decision.
Even though it is still a long way until November, the economy will be the most important issue to most voters come election time. Secondary issues such as gay marriage and abortion have become far less relevant to the average American. Even though the stock market is improving, the prolonged economic downturn has caused the middle-class to sink further and job growth to be considered tepid at best. New reports indicate that returning workers face steep pay cuts as limited wage growth has not kept up with inflation. Older workers starting new positions are further disadvantaged, as they are entering situations where they will never be able to work back to the pay level of their old jobs. In the end, the candidate who can convince voters their plan will get the U.S. back on top will be the one being sworn into office in January.