WASHINGTON, DC-At the last session held at the Urban Land Institute’s annual conference last week, former Federal Reserve Bank chairman Donald Kohn ticked off the many headwinds still facing the US economy: consumers are saving and not spending; banks cannot lend at the levels government would like because the demand is simply not there; the recession proved to be deeper than many had initially thought; and, finally, the worst problem of all--the ongoing overhang of housing.
But there are a few bright spots, he also said--one of which is waiting for fundamentals to improve. He also noted that the high unemployment dragging down the recovery is a function of the business cycle, and not a major structural component.
To be sure, Kohn said, there is a structural element to the current 9.5% unemployment rate. “We are seeing less residential construction and less activity in the financial sector,” he said. “And these jobs won’t come back anytime soon.”
However, the losses are not baked into the economy going forward, as many economists have feared. “My judgment is that the losses due to structural changes are not a major reason for unemployment,” Kohn related. He estimated that 5% of the unemployment rate is a result of “real slack” in the economy that will eventually recover.
Kohn had more good news to deliver: the headwinds the recovery is facing, although still severe, are starting to diminish. “We are seeing signs of this now,” he told the audience. “Households are increasing their net worth and banks, according to the latest Fed survey, are easing up on their lending criteria a bit.” Productivity growth is also easing, Kohn said, which means the demand for workers is more in line with the demand for goods and services.
Most intriguingly, Kohn said, businesses have showed a real uptick in their investments in equipment and capital purchases in the last quarter. In fact, he noted, “That is rising substantially and is something we may see reflected in household spending in the upcoming quarters.”
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
