April 6, 2010
Liz Ann Sonders is Senior Vice President and Chief Investment Strategist at Charles Schwab & Co., Inc. She has a range of investment strategy responsibilities reaching from market and economic analysis to investor education. She chairs Schwab’s Investment Strategy Council, which provides strategic asset allocation guidance and tactical sector recommendations for the firm’s investor base.
We spoke with Sonders on March 31, 2010.
You’ve said that “we're in the midst of a somewhat classic V-shaped recovery with more to come.” Can you elaborate on that view? Specifically, what will be the key drivers of growth in the US economy?
I have had the view that we would come out this in a relatively V-shaped fashion since last spring. I am not just reacting to what is obviously better news now. I anticipated that recovery would take place when I wrote in May of 2009 that the recession was ending. I believe we will find out that it officially ended sometime around then – maybe in June.
There is still a tremendous amount of skepticism about this recovery, even though just about any way you measure the economy – whether it is broadly or looking at the individual components – they all look very V-shaped. What the skeptics will note is that the compression was so deep, that we are now seeing just a statistical recovery. In other words, the percentages look sharp because of how significant the compression was.
I’m not arguing the “statistical” recovery. We’ve had deep recessions in the past. The initial phases of those recoveries are just that- they are big percentage increases because of what I think about as "coiled spring." You compress anything dramatically- industrial production, inventories, jobs, or GDP overall and the jump from those troughs looks quite remarkable.
The more valid argument is where we go from here. Is this the left half of a “W”? Or is the worst case scenario a square-root symbol, where we get the V-shaped part and then it flattens out?
To me, that is the more likely worst-case scenario, not a double dip recession, as long as we don’t have major policy missteps, like we did in the 1930s, i.e. protectionism. Barring those, a lot of the engines to move this recovery into the expansion mode could happen in the first quarter – i.e., we get to that prior peak point from which point you can officially consider it an expansion, not just a recovery.
The drivers will be different this time than what has driven the economy over the last several cycles. It is not going to have a heavy bias to consumer spending and that will surprise the skeptics who believe without a heavy push from consumers the economy can’t grow sustainably. The primary drivers will be business capital spending and an export-driven recovery – as it has been to date.
What about housing? Can the economy recover even if home values are still in a precarious state? Inventories of single-family homes are still rising and there is a potential for further declines in home values. How do you see that playing out in the recovery?
Inventories for the latest month of two have been up-ticking, but we are well down from the high of where we were.
We are in recovery mode in housing. Based on the Case Shiller numbers, for six or seven months in row there have been increases in prices (albeit marginal ones). We are finding the bottom. Typically real estate cycles tend to be more regional in nature. This one started as a regional downturn, and then obviously it became national. Everything got crushed. The recovery started with all regions participating as prices and sales began to recover off the bottom. Now at this stage you are going to see a more diverse set of numbers. In those regions where the price compression was greatest, and the drop was most severe, you are seeing some of the biggest sales increases and price improvements, at least in percentage terms.
You are going to see some pockets of better strength than others. It will be driven by those regions with the right mix of businesses and industries to be at the forefront of this recovery.
Gone are the days when we could make a universal comment about real estate, as we could when everything was imploding. We are finding the bottom in some areas, but it’s more than that. We are in recovery mode.
Inventories still have to come down more than they have. We are at about the flat-line for prices, relative to the double-digit declines that we saw at the worst phase in the crisis.
You don’t tend to get 180-degree turns in housing. But the improvement is sufficient enough to no longer be a drag on the economy. I don’t know that it’s going to be a big addition to the economy, though.
That said, look at a breakdown of GDP, and compare first quarter of 2009 to fourth quarter of 2009. The reason I compare those two quarters is that Q1 of 2009 was the worst quarter of the recession and Q4 of 2009 has been, so far, the best quarter for the recovery. You are comparing trough to (so far) peak. There was a huge negative contribution to GDP from residential investment in Q1. There as a decent positive contribution in Q4 of 2009. You are already seeing some beneficial impact. We know that with stability in house prices it is no longer detracting from household net worth, after having been a huge hit to net worth.We can get a meaningful economic recovery even if housing continues to find its bottom, as opposed to turning into a true robust housing recovery.
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