Is the Great Recession over? Housing prices in 18 of the 20 markets tracked by the Case-Shiller S&P Housing Report are up. President Obama has re-nominated Chairman Bernanke to maintain continuity at the Fed. Financial commentators (see Time Magazine and USA Today) are even suggesting it's time to buy a house.
Why then do I not feel like running out and spending money on all those items I have held back on this last year? I think it is because I feel like a pawn in a wave of forces trying to push consumers to spend.
I am sure you have heard of the "paradox of thrift," which maintains that although it is a good idea for individuals to save, if everyone does that, businesses and governments suffer. As a result, I feel that there are institutional forces that collaborate (consciously or not) to persuade people to get off the couch and rush to the stores - the government, the media, the retail industry, the banking world.
And yet, most of my friends and business associates do not feel good about things right now. Many are either out of work or working much less than they want to. Others are struggling with reduced stock portfolios and housing values. Still others are working harder than ever - for the same income - covering the work of those who were laid off at their companies. In other words, the Great Recession may be technically ending, but I recommend that consumers proceed with caution.
Here are my five reasons:
1. Housing data is deceptive. While prices are up June to July, these numbers are not seasonally adjusted for the spring-summer markets. Housing prices are still down more than 15% from July, 2008.
2. The housing recovery has been propped up by low interest rates (thank the Fed) by aggressive FHA lending (3% down payments) and by the $8,000 first-time home buyer credit (due to expire November 30). And, to date, the housing "recovery" has been limited to the lower end of the housing market.
3. Unemployment is probably going north of 10%. The media blared "good news" when job losses were "only" 250,000 in June - about half of six months prior. But how is that going to help the quarter-of-a-million newly out of work?
4. Much of the financial advice suggesting you start spending is biased. For example, the referenced article in USA Today analyzing whether it's a good time to buy a house relied almost exclusively on information from the National Association of Realtors - an organization that lives or dies on housing sales. You think maybe they have an agenda?
5. What does your gut tell you? Ultimately individuals are smarter than masses. Trust your gut. Is it pushing you to go out and start spending - the fuel of the economic boom from 2000-2006? Or, do you feel a bit burned by the advice you relied on during that period ("stocks are a great long-term investment and housing prices never fall")?
The Great Recession will end when consumers feel ready to spend. I will take my cue from consumers - not from others telling me it's time to jump back into the water.
Jim Randel is the founder of The Skinny On book series. His first book, The Skinny on the Housing Crisis, won first prize in a competition sponsored by NAREE, an association of 650 journalists covering housing, business and finance.