Hitting Bottom and the New Normal

Signs are beginning to point out that the economy may have hit bottom May 31st. Housing, which led us into this recession, will probably still continue to drop in most markets, but the larger economy seems to have adjusted to the slide in housing.

GM and Chrysler have been through bankruptcy and auto sales seem to have ended their slide. Fathers, it seems, got a new tool for Father's Day and have decided to put it to use. One home improvement retailer I frequent seems to have made it through the winter and spring selling garden gloves, cheese balls and M&M candies. Now, those going through the checkout seem to have something in the basket that can actually be installed in the home. Purchases are still small. They're not buying pallet loads of lumber and drywall, but something to fix up or pretty up the home that they are stuck with.

Unlike last summer, gasoline prices are more moderate and more stable. Heating prices this winter, especially natural gas, also looks to be more moderate and stable. A new natural gas pipeline across the prairie states called the Rocky Mountain Express is bringing gas to the Midwest and East Coast from Colorado and Wyoming, reducing our purchases from Canada. And while CIT's future is very uncertain right now, we've been able to make it through the first half of the year without a major financial disruption on the order of Lehman Brothers, AIG, IndyMac, Bear Sterns, Merrill Lynch or WaMu.

Businesses seem to have adjusted to what I call "the new normal". In many cases that required writedowns, layoffs and a change in business strategy. Many businesses have made the necessary cuts and are now poised to make a profit again. It won't be as heady as before, but profits can be made. Those firms that have engaged in creative accounting (often for their very survival) will be continuing to take writedowns for many quarters to come. In the real estate market in particular, there is a lot of inventory out there that is still priced unrealistically high. Generally, those properties are "upside down" and the owners or banks don't want to (or can't afford to) book the losses. So they continue to price the property to wishful thinking.

The following chart shows the home price history in Denver and Minneapolis. These cities are sunny in the summer and snowy in the winter. The seasonal effects have been pronounced. I think Denver's prices have stabilized but Minneapolis is due for one more year of losses before recovering next spring.