Yesterday was the University of Chicago Business Forecast. It is always interesting. They do it in Chicago, New York, LA, Singapore and London. If you are nearby I’d encourage you to attend. Prof. Erik Hurst called the housing crisis at it in 2007. He spoke today.
He is always compelling.
I was not able to attend, since I am in New York today. However, my friend Don Cummings of www.bluehavencapital.com did attend. Here are his notes from the conference.
I had the pleasure of listening to Randall Kroszner , Erik Hurst, and Raghuram Rajan on November 30th at the University of Chicago Booth Business Forecast 2011 luncheon in Chicago. The overall tone was cautiously optimistic, certainly more positive than last year’s tone.
Kroszner (former Fed Governor 2006-2009) feels reassured by business productivity and credits the immediate response made by many businesses to cut labor and overhead as the reason for their continued health. Although he isn’t a fan of the “new norm” thinking of protracted, long term low growth, he also feels it is highly unlikely that we’ll have a powerful recovery. He feels that quantitative easing has removed some economic risk, but that unknowns regarding taxes, spending, and healthcare will continue to hobble business investment.
Erik Hurst was all numbers and focused mainly on the housing market and the reallocation of resources that were formerly misallocated into increased debt and housing. Hurst believes that working through the excess supply of housing will take some time and that unlike other recessions, the exit strategy this time will involve increased savings rather than increased spending…further delaying recovery. Hurst had a interesting suggestion for revamping the unemployment process: Pay unemployment upfront in one lump sum in an amount that averages what is normally paid. If the person becomes employed quickly, he or she keeps the money…further incenting the person to return quickly to the work force. Hurst cited several studies showing that a spike in reemployment often occurs on last week of unemployment benefits…displaying the current system’s incentive to keep people out of the workforce rather than in the workforce.
Rajan, ever the humanist, also believes that we will have a longer, slower, “unspectacular” recovery. He immediately referenced the unemployment rates displayed by the highly educated/highly skilled versus the poorly educated/unskilled. Rajan believes income inequality is as much to blame for the current financial crisis as any other factor. Inequality leads to instability and instability is what got us into the mess we are in now.
Going back to housing- I agree with all three that we are in for a long, slow, recovery in this sector. Like a trader holding a bad trade, there are millions of people barely holding onto their homes and all the while reciting the mantra “Please just let my house get back to $XX and I’ll be out.” The housing supply, as high as it appears now, will be even higher if home prices inch up just a bit.
Those who are depending upon CPI to accurately display the inflation pain they are feeling are in for a rude awakening. With housing representing over 40% of the CPI calculation, it will be years before CPI accurately reflects the increase in costs the consumer will feel. Energy, food, metals, etc. will most likely rise dramatically, but CPI and all CPI indexed securities (watch out all you TIPs holders!) will barely budge.
Overall, the speakers were slightly positive about the economy. Housing will need to work its way out of oversupply, consumers will need to deleverage, and businesses will need some indication on the direction of taxes, spending, and healthcare before hiring.