Soft Patch: Economic Commentary

Soft Patch

There is no doubt that the recovery has hit a “soft patch” this spring. We have presented many of the reasons for this slowdown even before the slowdown occurred as they were inevitable. What are the main reasons? The first factor is the winding down of government stimulus, including the end of the homebuyer tax credit. The public sector is shrinking, especially at the state and local level which was bolstered by federal stimulus dollars in the past few years. According to a report released by outplacement consulting firm Challenger, Gray & Christmas, approximately 40% of all planned layoffs last month were in the government sector even though only 8% of Americans are employed by the government. The second factor is the rise of oil prices. There is no doubt about the fact that higher gas prices are constricting spending elsewhere. Finally, the most unforeseen factor has been the spate of natural disasters which have befallen the United States and the world. Each has delivered a blow to localized areas, the effects of which have been felt around the world.

The next question is–how long will this “soft patch” continue? For months we had an economic recovery which was void of the most important factor –growth of employment. Now job growth is slowing down just as it was heating up. Companies waited as long as possible to hire and now that the plans are on the books, they are likely to continue to do so as long as companies see the soft patch as temporary. If the pause in recovery lasts more than a season, then hiring could continue to slow. Most analysts think that this job growth should help the recovery sustain itself through the soft patch and help us avoid a double-dip recession — even as forecasts for 2011 growth are being trimmed. We should also look for an increase in construction spending as disaster stricken areas are rebuilt. Again, we emphasize that the slowdown does bring some good news in the form of lower rates and home prices for those are in the market to purchase. As a matter of fact, the length of the slowdown is likely to be a predictor of how long we will have to enjoy these rock bottom home prices and rates.

Update:  Bernanke’s comments yesterday did not help as some were hoping for additional stimulus to fight this soft patch.  Bernanke expressed confidence in the second half of the year and said QE II will end as scheduled in June–but left the door open a crack.   Stocks did not like his statement.


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