Academic journal article ABA Banking Journal

What to Watch for in Early 2011: Key Factors: Treasury Rates, Gas Prices, Mortgage Rates

Academic journal article ABA Banking Journal

What to Watch for in Early 2011: Key Factors: Treasury Rates, Gas Prices, Mortgage Rates

Article excerpt

One of the key themes in early 2011 is likely to be a shifting economic picture. The tax cut package has taken the double-dip recession scenario off the table, but the data for the next few months are likely to be mixed.

The housing sector will remain an important factor in the outlook. Some have suggested that we can't have an economic recovery until we get a housing recovery (as would be suggested by historical patterns of recession). Nonsense. This is not a typical recession, which is usually generated by the Fed raising rates to control inflation. In a normal recession, households postpone purchases of autos and new homes. Once the economy starts to recover, the pent-up demand in homes and autos leads the way. That's not going to happen this time.

Ultimately, a recovery in the housing sector will depend on jobs. We haven't seen enough job growth to provide much of a rebound in housing. Job destruction has been relatively limited. New hiring is restrained, but appears to be picking up a bit. The recent rise in long-term interest rates has brought 30-year mortgage rates back to where they were in May--not terribly high, but the recent increase isn't going to help. Not surprisingly, home prices fell after the expiration of the homebuyer tax credit. They should be stabilizing. If not, and they continue to head lower, housing problems are likely to get worse, as more homeowners will be underwater on their mortgage. This has important implications for consumer spending growth.

Gasoline prices are a major risk in the consumer spending outlook for 2011. …

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