Housing/U.S. Economy Solid
Last updated 2/24/2016 at 4:45am
A quick glance at the headlines of late seems to give the impression that the sky is falling and the U.S. economy is at risk of falling into recession. Persistently low oil prices are robbing oil and gas companies of their profits prompting budget cuts and layoffs. The slowdown in China is causing a rout in commodity prices contributing to recessionary factors in parts of the world that rely heavily on mining and raw material exports to survive. The strong dollar is making U.S. exports less competitive, resulting in a contraction of the manufacturing sector. The threat of negative interest rates and slower global growth is putting pressure on stock markets across the globe. With all of this negativity it is easy to get caught up in the idea that the U.S. economy is headed for trouble, but the underlying fundamentals that drive our economy are telling a different story. We need to take a closer look at all of these factors in order to get a better understanding of where we are and what the future will bring.
Let’s start with oil prices. What a wild ride this has been. Oil has gone from over $115 per barrel in the summer of 2014 to under $30 per barrel recently. You can blame OPEC for opening the taps, or the recent domestic shale oil boom, but it seems that low oil prices will be here to stay for some time. If you live in a region whose economy is heavily tied to oil, these are surely tough times. But overall, low energy prices are a net positive to the majority of Americans. Not only are people saving money every time they fill up their tanks or heat their homes, low energy prices are translating into lower transportation costs making a host of goods and services cheaper for all. Next is China. For years their economy was growing at a breakneck pace fueling an unprecedented appetite for raw materials to manufacture goods and build infrastructure. In the past this created shortages of some materials and caused the prices of these commodities to remain high. Now that their economy has reverted to slower growth there is a global surplus of commodities that has caused prices to come down considerably.
Again, this is a net positive to the U.S. as we play a small role in supplying the world with raw materials.
The strong dollar is another headline grabber. This is causing the manufacturing sector to contract, but we have to keep in mind that the U.S. economy does not rely that heavily on manufacturing or exports. What the strong dollar is doing for the average consumer is lowering the price of all those goods that we import from other countries around the world. Then there is the stock market which has been under pressure since late 2015. The factors causing this are varied, but let’s not forget that stock prices have been on a bull market run since 2009. Even with the recent volatility the Dow Jones Industrial Average is still more than twice as high as it was in 2009. And the recent drop in the stock market seems to be less
important to the average American than the gains in the value of real estate that have occurred over the last several years. While all of these negative headlines seem to be painting a scary picture, fears of the U.S. falling in to a recession are likely overblown when you consider the underlying factors that drive the American economy. Consumer spending accounts for two-thirds of the U.S. economic output. Household spending has helped the economy grow despite all of these other factors. Demand for everything from vehicles, groceries and building materials continues to grow. Job growth remains healthy and employers are having trouble filling vacancies. The latest housing numbers suggest that price appreciation is actually accelerating. The national median existing single-family home price grew nearly seven percent in the fourth quarter of 2015, compared with the same time the previous year. These underlying factors suggest that our economy will continue to expand and that the U.S. economy is resilient enough to overcome these negative global factors that are affecting the rest of the world.