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Comerica’s Johnson: Recovery is real, housing and jobs will lag

By Nathan Peck | MiBiz
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KALAMAZOO — The signs of economic recovery are out there and hard to miss.

That was the message Dana Johnson, senior VP and chief economist for Comerica Bank, brought to a group of business leaders in Kalamazoo. The risks of a “double dip” recession are overblown, Johnson said, and the economy is experiencing a healthy, if slow, recovery.

“We will have an extended, national recovery. People talk about a double-dip recession, (but) I don’t see that happening,” Johnson said. “This was a terrible recession that has caused all sorts of hardship, but it is not out of scale with other post-war recessions. What has been different was the level of panic in the financial markets.”

Johnson expects a brighter job picture in coming months, averaging 200,000 jobs created monthly, but still not enough to offset the 8 million jobs lost during the recession. Manufacturing and the stock market are leading, but a continued sluggish market for new homes is putting the brakes on the recovery.

Manufacturing has led the recovery, and capital expenditures have steadily increased from its bottom in March 2009. U.S. exports have risen over the same period, though they remain approximately 10 percent off their peak in the first quarter of 2008.

Companies reacted quickly to the recession’s onset, drastically cutting capital spending and cutting staff more quickly than they had in past recessions. Johnson said many companies are still operating under this “bunker mentality,” waiting for sure signs that the economy is in recovery.

“Companies cut drastically. Businesses are realizing that they don’t have to stay in the bunker, they can begin to spend on capital goods,” Johnson said. “We are not looking at an inventory restocking trend that will peter out. This recovery is very broad-based and will continue.”

That the U.S. is in recovery does not mean the country is out of the woods just yet. Johnson is heartened that personal and business spending is recovering, but is troubled that the housing market remains soft. American households saw a 30-percent decline in household net worth, a $17 trillion drop in assets during the recession. Despite the strong rebound in the stock markets, Americans have recovered just $7 trillion of that. While the economy is recovering at a modest 4-percent annual growth, if housing begins to contribute to the recovery, that rate could jump to 6 percent or more.

“We had not seen anything like this since the 1930s,” Johnson said. “It is a two engine plane (manufacturing and housing) that takes us up out of a recession. Right now the homebuilding engine has been dead — which is why we are seeing a slower recovery.”

Michigan housing prices continue to lag behind the rest of the nation, though the state did avoid the residential price bubble that plagued other parts of the nation. Existing house prices in the state rose 22 percent from the beginning of 2000 to their peak, according to data Johnson cited from the Federal Housing Finance Agency (FHFA). Home prices in Michigan declined sharply during the ensuing recession, falling 24 percent. By contrast, the FHFA national index rose 62 percent from early 2000 until it peaked in 2007 and since then has fallen back only 11 percent during the recession. Still there is a bright spot. Johnson explained residential building permits pulled during the first three months of 2010 rose 84 percent from a year ago.

Johnson, who worked eight years for the Federal Reserve, praised the Fed’s quick response, and said few people realized how close the economy came to collapse in 2008. As the housing market was in free fall, the banking industry was thrown into meltdown.

“At the time, there was not a bank on the planet that could borrow for a longer period than overnight. We came within the eyelash of total economic failure,” Johnson said. While the Troubled Asset Relief Program and other actions of the Federal Reserve and Treasury Department remain unpopular, “the country was incredibly well served” by Fed officials. “We staved off an incredible attack on the credit markets.”

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TAGS:

• comerica bank
• dana johnson
• finance
• kalamazoo