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Economic Update

1/31/11

Friends and Colleagues,

The new year has brought with it the opportunity for hope of a better economy to come. A nice thought to be sure…but what do the pundits have to say about where we are and what lies ahead? This week, our friends at Wells Fargo Securities (WFS) share some enlightening thoughts about where we are and where we are headed in the economy.

Sound Bites on the Economy from WFS:

Good News:

• Real GDP grew at a 3.2% annual pace in Q4.
• Consumer spending surged 4.4%...the best in five years.
• Net exports increased, far outpacing imports, and contributing 3.44% to economic output.
• The true strength in the economy can be found in real final sales, which jumped by 7.1%!
• Consumer confidence rose 7.3 points in January to 60.6, the 4th increase in five months.

Bad News:

• Inventories pulled back significantly, shaving 3.7% off real GDP.
• Consumers’ assessment of current economic conditions is only marginally higher today at 31.0 than it was two years ago at 29.7.
• Unemployment has remained above 9.0% for the past 20 months.

WFS Projections:

• Increasing private sector job growth in 2011.
• Not much improvement in overall unemployment.

Housing Market:

• New home sales rose 17.5% in December but from historically low levels.
• Builders continue to face tough competition from foreclosures, which limit price flexibility.
• Credit conditions remain tight.
• Mortgage applications for purchase fell 8.7%, the 4th consecutive weekly drop.
• WFS projects housing activity will likely remain weak until the backlog of foreclosures and short sales is cleared.

Consumer Saving and Spending:

• Consumer spending grew 3.8% in November, the strongest growth rate since May.
• Personal income growth was also strong, up 3.4% in November.
• As consumption has grown faster than income, the saving rate has declined from 6.3% in June to 5.3% in November.
• However, savings are still nearly four times higher today than at the dawn of the recession!
• WFS projects that with savings high, consumer spending will remain strong in the medium-term.
• Higher savings and lower levels of consumer debt will strengthen the economy for the next round of sustained economic growth.

Interest Rates:

• The FOMC stated that they will keep rates in the target range of 0 to ¼ % for “an extended period of time.”
• The FOMC reported that economic growth is not sufficient to bring greater improvement to the labor market.
• It reported continued declining inflation.
• It does not perceive rising commodity prices as a sign of future upward inflation pressure.
• WFS projects inflation will remain below 1.6% over the next two years.

Monetary Policy:

• Citing continued high unemployment, the FOMC elected to continue the second round of quantitative easing (QE2), which began in November 2010.
• The FOMC signaled its intent to complete the purchase of $600 billion in long-term Treasury securities through Q2 2011.
• WFS projects the FOMC will complete the entire QE2 stimulus through the spring; thus, short-term rates should remain low over the near term, and long-term rates should remain stable.
• WFS projects interest rates will gradually begin to rise and increase more rapidly toward the second half of 2012.

Fiscal Policy:

• The Congressional Budget Office (CBO) just released its long-term projections for the U.S. budget deficit.
• The CBO projects the U.S. deficit will likely reach $1.5 trillion in the current fiscal year.
• Over the long term, the CBO projects the U.S. deficit as a % of GDP will decline to 3.0 to 3.5% by the middle of this decade.
• WFS predicts this continued deficit spending and the need to finance it will put upward pressure on rates over the next few years.

Overall, more good news than bad, and certainly a much brighter picture than this time last year. In the coming months our story will continue to evolve, so as always...stay tuned……


THOUGHT FOR THE WEEK
What We Think About

“A man is what he thinks about all day long.” Ralph Waldo Emerson

A powerful and daunting concept…our very thoughts define who we are. So what do we think about?
Our problems and frustrations and what is wrong or not working in our world? Or do we think about our blessings and joys and all the good and beauty that surround us?

A powerful corollary is that whatever we think about will grow in our lives. If we focus on our problems, then we become our problems. They cloud how we act, what we say, and what we do. They expand… they grow… they define us.

If we dwell instead on our blessings, then we will find our lives filled with blessings. Appreciation… joy… love and abundance. These too expand and grow when we choose to dwell on them and share them.

A beautiful sunset happens every day…whether or not we choose to see it.

In the days and weeks ahead, may we choose to see the good in our lives. May we look for and appreciate the many blessings we have been granted.

Make it a great week!

David Rosenthal, MAI, FRICS
President & CEO
Curtis-Rosenthal, Inc

drosenthal@curtisrosenthal.com
http://www.curtisrosenthal.com/






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