Small sprouts of good economic news.

by w3woody

The economy has been sucking wind for four years now, and is moving on it’s fifth year. We’ve had prognostications about how we’re seeing the decline and fall of America–a prediction that has been made about America since there has been an America.

The latest prognostications have suggested that we’re becoming China’s “bitch” (never mind the Chinese experiment finds itself on shaky grounds), that we’re no longer competitive. We don’t even make our own iPhones, reflected in our declining participation rate.

Clearly, we are a country in decline.

Or are we?

Suddenly we are starting to get some good news–and the doomsday prognostications seem weaker.

As a nation we’re deleveraging, manufacturing may be on a long-term rise, and the latest jobs report was quite good.

But here’s the thing:

Yes, we’re in the middle of a new industrial revolution, where computerization is reshaping our economy: when was the last time you bought a record from a record store? We’re seeing the very products we buy transformed before our eyes.

Software is king.

But this is a long-term trend which, perhaps in another twenty years, will leave us in a world as unrecognizable to those of us who were alive in the 1980’s as the world of the 1940’s would be unrecognizable to someone from the 1890’s.

In the short term, however, our major economic woes stem from one single economic event: the collapse of the housing bubble. It has hurt the construction business, where the majority of small business formation activity takes place. It has hurt purchases of major appliances and furniture and all those other sectors of the economy which service new housing construction: if no new houses are being built, no new refrigerators and stoves and couches and shelves and knick knacks are needed to go into that nonexistent new house.

It has also hurt unrelated small businesses whose owners rely on equity from their house to fund expansion plans: no home equity, no home equity line of credit to fund your small business.

This collapse was a result of ARM resets making it impossible for a large number of people who bought houses with a sub-prime loan and a 5 year teaser rate to afford the sudden increase in mortgage payments when their ARMs reset. This caused the economy to collapse in 2008.

So of course we won’t see a solid recovery until 2013.

That’s because we’re talking about ARM resets, with a 5 year reset period. And of course ARMs are still resetting: people are still losing their homes. There is a huge backlog of shadow inventory which is depressing new home construction, and a huge number of home distressed sales keeping new home sales down.

And guess what?

2008 + 5 = 2013.

This recession was always going to be 5 years long, precisely the amount of time between people getting subprime loans and the time those ARMs reset. And during those five years we’ve engaged in a substantial restructuring, so when jobs come back our economy will be much stronger for it.

We are now far more worried about financial stability–which has led to us de-leveraging. We’re more worried about Europe, so investors are leery: when Europe fails (as it must), we are positioning ourselves to insulate our banks from more than a minor disruption in cash flows. And we’re far more worried about economic efficiency and making the necessary changes in our unfunded liabilities (unfunded pension plans and social security), setting the stage for major reforms.

All in all, the next year will see some thawing.

And Q1/Q2 of 2013 will see a full economic recovery, hampered only by a Eurozone failure that will make major headlines and worry a lot of pundits, but only represent a relatively minor economic headwind here in the United States.

And when the world blows up (when China unwinds, when Europe unwinds), America will be the last ones standing, and stronger than ever.