Economists predict slow rebound

COEUR d’ALENE — One indication of the state of the economy was revealed Friday when Wells Fargo held its annual Economic Outlook not in an expensive resort convention center, but instead via teleconference.

Four economists with Wells Fargo Securities generally shared one point of view — the economy will rebound, but will take years to return to levels seen a few years ago.

“Housing and commercial real estate are central to the recovery,” said Mark Vitner, senior economist. “It has been complicated by the stimulus programs.”

This year’s tax credit for home buyers created a spike in sales that distorted the market, he said.

“The future will be determined by the fundamentals, Vitner said. “It is not likely to improve until employment and income improve.”

With an excess inventory of 2 million homes nationwide, it is expected to be a slow road to recovery.

“We expect a 20 percent rebound in 2010 and 2011,” he said. “That sounds good, but it’s not even the norm for the end of a recession.”

Commercial properties, which are not so much overbuilt as overpriced, will see improved vacancy rates.

“The office market is not as junked up as it was,” Vitner said. “Retail is the most problematic because it followed housing.”

National trends will effect the regional market, said Scott Anderson, Ph.D, another senior economist for Wells Fargo.

“California is slowly stepping away from the abyss,” he said.

That state’s housing market, which created a surge in migration away from the Golden State as homeowners sold high and bought lower in other states, including Idaho, is improving after seeing a sharp decline in the past two years, he said.

Foreign investments helped drive the economic boom in the early half of the decade, but have declined significantly.

“The U.S. is not alone with the credit bubble,” said Jay Bryson, global economist. There is little worry that China will see a credit crisis similar to the one in this country, however. “It’s not something that keeps me up at night.”

Real estate foreclosures, which have been prevalent among mortgages secured with no documentation or other marginal means, are now rising in the traditional lending market, Vitner said.

Often even modified loans do not work out. More than 75 percent of modified loans are delinquent again after 90 days, he said.

“It doesn’t matter if they are restructured if the homeowner doesn’t have the available income,” he said.

Recovering the anticipated 9 million jobs lost during the recession will likely take until at least mid-decade, and rather than the 5 percent unemployment that has been considered “full” 5.5 percent or 6 percent will probably be the future norm.

That is in part due to 100,000 added to the work force each month, and many will be unqualified for the jobs that are available. Education will be a critical component of the recovery, Vitner said.

“The 21st century economy wants more skilled workers, plumbers, electricians, Ph.Ds,” he said. “There is a shortage of those over time, but the excess of low skilled workers is a huge challenge.”

John Silvia, Ph.D, chief economist and moderator of the discussion, said politics may be at odds with economics.

“The primary risk is policy,” he said. “Politicians care about 2010. “Business people plan to be around a long time.”

Monetary policy is complicated by an outsized federal deficit, and he is discouraged by the lack of fiscal restraint in extending Medicare to people age 55 and up, he said. While stimulus plans have helped, “We have to judge when the economy can stand on its own.”

There is hope for the developing market in Asia, where savings rates are better, Bryson said.

“That is important,” he said. “When people put money in banks, they can loan it out.”

He also expects the U.S. dollar to strengthen against European and Asian currencies in the coming year. Investment will also improve as the rate of return rises, Bryson said.

There will always be unmet needs in developing countries, which means improvements in exports from the U.S., he said.

“We still lead the world in creativity,” he said.

There is a fine balance between what is good for consumers and what is good for banks, Silvia said, with 75 percent of the economy based on consumer spending.

“They want everything but can’t afford anything,” he said. “If credit is extended and they can’t sustain the payments, the fundamental challenge is in (servicing the debt). How many do we expect to own houses. How many do we expect to own fancy automobiles. How many do we expect to own big-screen TVs.”

The full Economic Outlook 2010 report is available online at https://www.wachovia.com/common_files/2010_Annual_Outlook.pdf