RealEstateEconomyWatch.com

Investors are anticipating a recovery for the U.S. economy in the second half of this year as evidenced by recent upward pressure on long term interest rates and by a rebound in equity values over the past several months.

Indeed, supporting evidence is mounting. After contracting 6.3 percent in the fourth quarter of last year and 5.7 percent in the first quarter of this year, GDP is projected to contract by only 3 percent in the second quarter and to modestly increase in the second half. All of a sudden, most measures of economic activity are turning in a positive direction. Initial jobless claims fell by 24,000 to 601,000 for the week ending June 6. Claims are down over 42,000 during the past month, suggesting that the pace of job layoffs is slowing. In addition, payroll employment was down 345,000 in May, compared to a 642,000 monthly average since November of 2008. Such a substantial slowing in monthly job losses suggests that the worst may be over in the labor markets.

On the consumer side, retail sales were up 0.5 percent in May, after two consecutive monthly declines. Looking at the past four months, retail sales have been essentially flat which is a positive development compared to the large monthly losses in retail sales during the second half of last year. Consumer confidence is also moving in the right direction. The Conference Board’s consumer confidence index rose to 54.9 in May from 40.8 in April. The index has experienced its sharpest two month gain on record, climbing 28 points since March. Although the level of the index continues to reflect low consumer confidence, recent gains indicate that consumers are becoming more optimistic about the economic outlook.

On the production side, durable goods orders were up 1.9 percent in April, while the Institute for Supply Management’s purchasing managers’ index rose to 42.8 in May from 40.1 in April. The index has now increased for 5 consecutive months. The steady rise in the index indicates a slowly improving manufacturing sector, consistent with a rebound in the economy by the end of the year.

The housing sector is also showing some signs of modest improvement. Existing home sales, new home sales and single family housing starts are now hovering above their January cyclical lows. Housing affordability measures are at record highs and pending home sales are on the rise.

But the road to recovery for both the economy and the housing markets is anything but smooth. Rising interest rates are increasing borrowing costs, threatening to inhibit consumer and business spending. Thirty-year mortgage rates are now well above 5 percent, raising the costs of homeownership at a time when the housing sector needs to attract buyers. The housing tax credit is running its course as some states like, California, are running out of funds supporting the credit.

There is also talk of the U.S. government as well as other major foreign governments winding down their enormous spending programs that were so effective in keeping their economies and financial markets from collapsing. The fear is that excessive government spending (and printing of money) has created substantial budget deficits, which eventually will exert significant upward pressure on inflation and interest rates. To that end, some expect that the Federal Reserve may soon adopt a more restrictive monetary policy and begin to raise interest rates.

Not long ago, it seemed like the financial markets were on the verge of collapse and the U.S. economy was spiraling out of control. At this juncture, it would be premature and unwise to unwind the very programs and policies that helped stop the bleeding. We are not out of the woods yet. According to a recent survey conducted by the Treasury Department, large banks are still not lending; the dollar amount of new loans issued by the 21 biggest recipients of taxpayer funds under the government’s Troubled Assets Relief Program, fell 7 percent during March. And according to a recent Federal Reserve report, household wealth continues to drop. Households experienced a $1.3 trillion loss in wealth in the first quarter of 2009 as both stock and home values continued to decline. Household wealth in the first quarter was $14 trillion less at $50.4 trillion than the $64.4 trillion peak posted in the second quarter of 2007!

We have already experienced a great deal of blood, sweat and tears to get to the point where we are now seeing a flash of light at the end of what was a very dark tunnel. Let’s make sure we are crossing the tunnel’s opening before we declare victory.