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Barton Smith Symposium Discusses Realities of Economic Recovery
The presentation, "Countdown to Recovery: What's Been Accomplished; What's Left to Do," held at the Hyatt Regency Houston Hotel in downtown Houston, provided the newest economic statistics on the global, national and local economies and included Smith's interpretation of what they all mean, especially to Houstonians and the regional economy.
Smith questioned whether one could call the current economic state of affairs a recovery, though he does believe that the improvements seen over the past several months will likely carry over to next year and very gradually get stronger. With statistics provided at his presentation, Smith examined the current state of affairs of the global, national and local economies. He indicated that while the national economy is on track with expectations from previous presentations, the broader global economy and the narrower local economy are actually now doing better than anticipated. Yet, he said there remain a host of contingencies upon which the recoveries of all these economies will depend. In particular, he was adamant that both governments and central banks must start work now on a viable exit plan and that no true recovery can be proclaimed until all of these economies can start growing again without life support.
While Smith believes that you can't examine Houston's future today without understanding the prospects nationally and globally, he did point out key aspects of the Houston economy that still set the city apart. During the presentation, he showed that the sudden collapse in the local economy this spring has slowed and explained why this moderation in economic contraction is likely to continue. Breaking tradition from the usual November symposium, he also provided new data on local real estate markets. This data indicated that, in many dimensions, the Houston housing market is still far outperforming the national market. Prices of non-foreclosed properties in Houston have hardly declined and are not significantly different than they were in 2007. The only part of the market with significant weakness is the smaller, more inexpensive, starter home market where foreclosures are particularly high. In terms of performance, Houston's commercial real estate is also holding up relatively well, but property values are falling significantly following the national trend.
A major message of this fall's symposium was the importance of stabilizing the labor market before any substantive recovery can be proclaimed. The national economy has lost seven million jobs, and the local economy has shed almost 100,000 jobs. Unfortunately, these declines are continuing, though at a slower rate. Nationally, job losses are still accumulating at about a quarter million per month, and Houston is now losing jobs at about 6,000 per month. This, Smith, says must end before anyone should proclaim that we are in a recovery.
Clouds still on the horizon include a continuation of high mortgage delinquencies, the recent increased pace of business bankruptcies and bank closures, and a consumer that is still overwhelmed with debt and fearful of job security. Smith takes as a given that these problems will persist through 2010, but none will produce quite the scare that was experienced last fall and this past spring. What concerns him the most is that policymakers have yet to articulate a well-defined exit plan, eliminating the extraordinary life support that is currently propping up the nation's economy.
"Sooner, rather than later," Smith said, "policymakers must address the challenge of bringing the federal deficit under control. The run away deficit has Americans worried, as well as foreign governments and investors."
Smith explained that the job of balancing the federal budget will be difficult, much more so than the effort in the mid-‘90s. "It will be virtually impossible to balance the federal budget without an increase in taxes," Smith said. Nonetheless, he sees that balancing the budget will also require major government cuts and economic growth as well as increased tax rates, an increase he argues should be shared by all Americans.
On the bright side for Houston, Smith points out that despite the fact that energy prices are substantially lower than their summer of 2008 peak, real dollar prices (adjusted for overall inflation) are significantly higher than they were in 1980 during the height of the energy boom of the ‘70s and early ‘80s. "This is not your typical Houston energy bust," Smith said. "The losses have been across most industries, reflecting the pain and adjustment that the entire nation is going through right now." As the U.S. employment picture brightens, so should Houston's, but that is not likely to occur until sometime next year, he said.
Because Smith and his associates at UH's Institute for Regional Forecasting estimate annual changes in employment in terms of yearly averages, the IRF is still forecasting job losses for 2010 in Houston, even though by year's end most sectors will actually be experiencing some job growth again. Population growth is expected to continue to be positive, but quite weak as job gains later in 2010 will absorb labor from the current work force more than pull new workers into the region. Furthermore, the sharp decline in national home prices will make it more difficult for workers to move from one region to another searching for jobs.
The IRF forecasts include several predictions:
- A meaningful U.S. recovery will not begin until 2010.
- Houston's recovery will follow the nation's lead much more closely the previously anticipated.
- The national and local economic recoveries will be bumpy and not broad-based. Many sectors will continue to be weak throughout much of 2010.
- Expenditures on the Obama stimulus package will actually be greater next year than this year. This should keep the economy moving towards recovery mode, at least until the spending dramatically slows down in 2011.
- Oil prices will stay within their current range, but natural gas prices are likely to weaken again after winter.
- Consumer confidence will be slow to recover. While the overall economic trend will be positive, the news for most of next year will be mixed, producing continuing uncertainty about the future.
- Interest rates will start to climb in 2010 and by the end of the year the increase will be fairly rapid.
- Average employment in Houston in 2010 will be 10 to 14 thousand lower than 2009's average, but over half of all regional sectors will show year-over-year job gains by this time next year.
- The local economic environment in 2011 will be much improved, but it won't be until 2012 that employment growth exceeds 50,000 per year again.
- In terms of the housing market, new home sales will be helped by an improving tone to the local economy, but will be hurt by rising interest rates. Home owners shouldn't be overly worried because prices are not likely to fall in Houston more than about 1 or 2 percent. Home builders, on the other hand, are likely to have to wait until 2011 and 2012 before new home sales will start moving back up to normal levels.