Is Optimism About the Economy An Illusion?

AMA1-12-14As a new year gets underway, predictions abound about what lies ahead in the months to come. After the uncertainties and reversals of the past few years, there’s no shortage of pundits

and prognosticators who foresee better days ahead for the economy, based on recent stats from major sectors like housing and unemployment. But that rosy outlook may be based on an illusion.

It’s no secret that the housing market has had its ups and downs, plagued by bad loans, bank fraud and the major collapse of 2008. And the health of the housing market remains a key indicator of the health of the overall economy. That’s why investors and analysts point to the continued appreciation of housing prices and a short supply of available homes for purchase as indicators of a rebound.

Another clue lies in the status of the Federal Reserve’s stimulus plan, now headed for a slight taper down in 2014. The Fed is basing its decision to begin drawing down its Quantitative Easing project on positive numbers from employment and the housing sector, which suggests that those figures indicate stability and even some growth.

But because the stimulus created artificially low interest rates and kept them low, a tapering down means those interest rates will rise. And that, along with new lending standards aimed at forestalling bad mortgages of the type of the type that sank the housing market in 2008, may actually have a cooling effect on home buying and shut some potential buyers out of the profess.

The status of available housing may be deceptive, too. Banks and other financial institutions are still holding large inventories of foreclosed homes that, for various reasons, have yet to make it to the market. As those institutions make decisions about the fate of those properties, the flow of low-cost properties into markets around the country may become either a trickle or a flood.

Who will buy those available homes? The employment stats used to show that job growth is up and unemployment is own may also be based on illusory information, since the stats don’t account for the growing numbers of people who aren’t looking for work at all, or who have stepped into the shadow economy of under the table work. Although the unemployment rate fell to 7 percent by the end of December 2013, 11 million Americans remained on unemployment.

Still, economists point to even modest growth in those two key sectors as an improvement over the past few years, and that means a cautiously optimistic outlook for the coming year. But for investors following Jason Hartman’s strategies, the economic glass may be half full, not half empty – if there is a glass at all. (Top imageLFlickr/cooperweb)

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