Last Week's Highlights

There is no sign of inflation, but there are plenty of signs of life in this economy. Following last week's surprisingly good report on retail sales, this week brought news of strong orders for durable equipment. And The Conference Board Leading Economic Index® for the U.S. suggested the economy could be developing momentum over the next few months. Few expected the news to be this good. Why not? Where are the profits to support business investment, or the income growth to support consumer spending? And where is the confidence to convince business executives or consumers to spend?

THE SITUATION ABROAD

Europe may worry about the size of the Greek debt, and that other countries may run into trouble. Japan worries about growing too slowly (as suggested in the April Tankan — business confidence — survey). China worries about growing too fast. Still, conditions all around are much better than a year earlier. Indeed, the revised IMF forecast for growth in Europe is higher now than the forecast produced six months ago. Yes, Japan's Tankan reflects nervous concerns, but not as much nervousness as six months earlier. And China? Not many other countries are worried about growing too fast in 2010.

FACT OF THE WEEK

20. Real estate experts suggest that if the annual rent on an apartment is more than 20 times the asking price of a house, you're probably better off continuing to rent. But if the ratio is under 20, it might be in the best interests of the renter to buy. The long, strong decline in home prices has brought the ratio down in most metro areas of the country. Still, the ratio remains above 30 in some of the priciest markets in the country: Honolulu, San Francisco, and Seattle, to name a few. Conversely, the ratio is below 15 in some of the economically depressed and harder hit metro areas, including Pittsburgh, Detroit, Cleveland, and Phoenix, for example. And, the ratio has continued to fall sharply over the past 12 months, on top of prior declines. The ratio was more than 10 percent lower in Las Vegas than it was a year earlier, in part because home prices continued to fall sharply for a third straight year. Finally, experts say that the single biggest factor to consider is not the state of the real estate market, but the state of the local job market. After all, a paycheck helps to pay the rent or the mortgage.

QUESTION OF THE WEEK

Consumer debt was high before the recession. All the stimulus spending has resulted in high public debt as well. Will all this debt help reduce growth prospects for years to come?

Indeed, the run up in public debt is a major concern. U.S. government deficit (excluding state and local obligations) peaked at a little over 8 percent of GDP and is now expected to return to no more than 6 percent by the end of 2011. But economic growth alone is unlikely to bring it down further — to the 3-to-4 percent range experts say is the ideal ratio. A combination of spending cuts (especially in transfer programs like social security) and new revenues (higher taxes) may be required to get it down to that range.

Meanwhile consumers have already adjusted household budgets. This means a little more of the average paycheck is being saved. In turn, this means less growth in spending relative to income growth going forward. And, that spells a slower recovery now and a more dampened economic expansion going forward. However, the pool of funds now being assembled via this increase in saving could be the capital needed to exploit innovative ideas tomorrow. In sum, more saving now, as consumers spend a little less (and incur less debt) relative to income, may be the path to better growth prospects tomorrow.