Economic Upswing? Ask Again in a Year

In 6 important sectors, don't expect much of a rebound until 2010.

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Are we there yet? The plaintive plea of the summer car trip can just as well be applied to the weird odyssey the American economy is on. The destination, of course, is the end of the recession—or slowdown, or meltdown, or whatever you want to call it. And if you carefully study the right indicators, it looks like we'll have to buckle in for a good while before the economy stops sputtering.

For all the headlines about undercapitalized banks and unpronounceable securities, most consumers just want to know when the bad news will end, so they can plan their lives. Nobody can say for sure, of course. Yet in real life, people have to make guesses all the time about whether it's a good time to buy a new home or car, make a risky career move, or borrow from their savings. And Americans are clearly spooked about doing much of anything: Consumer confidence numbers are the most dismal in 40 years.

So why not venture a few guesses about when various sectors of the economy might actually turn around? Things have to improve eventually, and, since 1945, the average downturn has lasted just 10 months before the economy bottomed out and started to advance. So here's a bit of handicapping on the six scariest parts of the economy:

Housing. It didn't feel like the beginning of a bust at the time, but the housing market started to decline in 2006, when existing-home sales fell by 8 percent and new-home sales dropped a much steeper 18 percent. It's only gotten worse since—and there's no sign of a letup any time soon. A few regional markets are doing OK, but nationwide, it's still likely to get worse before it gets better.

Falling prices ought to lure buyers at some point, but that's going to be offset by tight lending standards and, probably, rising interest rates. Problems at Fannie Mae and Freddie Mac, which back nearly half of American mortgages, will crimp lending even more. If the job market gets much worse, that will be another reason for people not to buy homes. The outlook is so gloomy that the National Association of Home Builders' confidence index, which measures how builders think their businesses will fare over the next six months, is at a 20-year low.

Prognosis: Housing sales could pick up steam in some markets by next year, but a national turnaround probably won't begin until 2010. And it's likely to be a slow rebound; recall that it took tech stocks nearly eight years to regain their losses after the dot-com meltdown in 2000. Some areas, such as the distant suburbs surrounding bust towns, could be depressed for years.

Gas prices. Politicians and a few others insist that financial speculators are responsible for the huge run-up in oil prices. Don't expect much from current efforts to rein speculators in. At most, they have added 30 percent to the price of oil, and it's probably a lot lower than that. Even if the U.S. government came up with new limits on speculators—dubious in a complex, global economy—they'd probably be weak. And the smart money at energy companies, automakers, and investing firms seems to be betting on gas prices staying near $4 per gallon for the foreseeable future--and maybe going higher. That's because of fundamentals: Demand for oil is simply growing faster than supply.

Prognosis: Oil and gas prices could drift down for a while as the U.S. and other economies cool off and demand slackens. But once economic activity picks up, expect oil prices to rebound as well. Smart consumers should assume high gas prices are here to stay. Even if that prediction turns out to be totally wrong, what's the harm in buying energy-saving products? You'll still save money down the road, just not as much.

Food prices. Many of the same dynamics affecting oil prices—such as growing demand and intensified commodity trading—have driven up global prices for wheat, corn, and food in general by almost 15 percent per year since 2003. That reverses a 50-year trend in which food prices rose by less than inflation, effectively making food cheaper every year. A recent study by the Council on Foreign Relations argues that food prices will stay high unless central banks and policymakers target food inflation directly. But others point out that unlike fossil fuel, the supply of food can be increased in a number of ways: by more efficient farming in developing countries, for instance, or by diverting less corn to ethanol or other uses.

Prognosis: There are a number of levers to help bring down food prices. It seems reasonable to expect prices to moderate by 2009 as regulators take on this growing problem and market solutions emerge.

The financial crisis. To most Americans, it doesn't really matter if Merrill Lynch or Citibank lose billions. But deep problems on Wall Street are making loans harder to get, dragging down the stock markets, and adding to the national gloom. Huge swings in Wall Street earnings—mostly downward—show how hard it is to predict when massive amounts of bad loans and toxic securities will finally be cleansed from the big banks' balance sheets. But Treasury Secretary Henry Paulson has offered some clues. While discussing the listing banking system recently, Paulson said, "I think it's going to be months that we're working our way through this period—clearly months."

Members of the president's cabinet are supposed to be cheerleaders, not doomsayers. So assume that when Paulson publishes his memoir in a few years, he'll reveal that he was far more worried than he let on and actually meant "years" when he said "months." There are some mitigating factors, though. The Federal Reserve and other regulators have the power to contain some of the damage. Flush foreign investors seem willing to provide cash when the big banks need it. And consumers could very well get back on their feet before some big institutions do.

Prognosis. Losses and heavy job cuts in the financial services sector will probably persist through 2009, which will continue to weigh down mortgage lending and the housing market. But there's no reason for that to bring down consumers who have good credit and are comfortable spending money. The rest of us might have to get used to spending within our means.

The weak dollar. This isn't strictly a bad thing, since the weak dollar has made U.S. goods cheaper to the rest of the world and boosted American exports—one of the few bright spots in the economy. But the weak dollar also makes oil and other foreign goods more expensive to Americans and discourages global investment in the United States.

Prognosis: The dollar could be close to bottoming out. The Federal Reserve, which has been cutting interest rates for years, now seems likely to keep rates steady or raise them to guard against inflation. That will draw more foreign funds to U.S. securities and strengthen the dollar. Gas prices might fall a bit as a result, and it might make Americans feel better. But a stronger dollar won't have much of a direct impact on American wallets—except for those comfortable enough to travel overseas.

Consumer confidence. Maybe they should rename this economic indicator Consumer Dismay, because the latest numbers suggest the economy is in catastrophic condition. Other important measures, like unemployment and inflation, are far less alarming. Confidence is psychological, of course, and it does make sense that the plummeting value of homes—where most people have invested most of their wealth—would induce a national pout. And the continual upward creep of gas prices—broadcast in billboard-sized numbers —is like posting a prophet of doom at every intersection.

Still, many long-term homeowners are sitting on plenty of equity, and our fixation on gas prices conceals ongoing declines in the price of other things many of us actually spend more money on—like cars, appliances, communications, and entertainment.

Prognosis: Once there are signs of an upturn in the housing market, confidence could rebound quickly. That might not happen until 2010. But when consumers do finally bounce back, pent-up demand could trigger a buying binge. Until then, please stop asking when the misery will end, and find something to keep yourself busy. We'll get there eventually.