Moody's Mark Zandi: Ignore The Doubters, And Embrace The Recovery In 2011

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The U.S. economy looks set for a turnaround, but there are risks that can’t be ignored, according to Moody’s Mark Zandi.

In his latest report titled Headwinds Fade, Tailwinds Build, Zandi outlines how the U.S. economy has recovered from the depths of recession. The big story is the return of consumer demand, which should also increase hiring and reduce the U.S. unemployment rate.

But there are worries, may we’ve heard about before: European crisis hits Spain, China lands hard, or the U.S. foreclosure crisis expands to further deflate home values.

But Zandi says the positives outweigh the negatives, and this year should look good.

Housing will hit its bottom in 2011 with more than 4 million mortgage loans in the foreclosure process. Distressed properties will account for a large proportion of home sales.

With residential construction falling to pre-World War II levels, house prices have plunged more than 30% and nearly 5 million households have lost homes through foreclosure.

Source: Mark Zandi, Moody's Analytics

Households have been under pressure to reduce debts because of weak assets and high unemployment.

With the housing crash, homeowners are no longer spending as much with deposit rates near zero and returns on other investments very uncertain.

Source: Mark Zandi, Moody's Analytics

Spending on debt service is declining and households are showing signs of exit from the deleveraging process.

Households have been less focused on how much they owe and concentrating on what amount of their cash goes to paying off debt. But that will start to ease up soon, and debt service payments decline.

Source: Mark Zandi, Moody's Analytics

Creditors will begin to loosen the spigot by easing lending standards which will help increase consumer spending.

Credit lending is already rising with new originations for credit cards, auto loans and consumer finance loans above year-ago levels for the first time since 2007.

Source: Mark Zandi, Moody's Analytics

Healthy corporate balance sheets will enable businesses to strengthen investment and hiring.

Corporate balance sheets are in in great shaped heading into 2011.

Source: Mark Zandi, Moody's Analytics

Managers will eventually realise cutting costs is not the only way to boost profits so they will start to hire more.

It has taken businesses longer to start hiring in this environment because of credit constraints on smaller businesses and many managers are still psychologically upset from the Great Recession, but that's about to change.

Source: Mark Zandi, Moody's Analytics

Vehicle sales will rise as pent up demand hits the market.

Low demand hit auto industry sales especially hard coming down to a pace of 9.5 million annual units in 2009. Now vehicle sales are expected to rise throughout the year as the job market improves and credit eases, boosting confidence.

Source: Mark Zandi, Moody's Analytics

More policy support, such as the Obama-GOP tax deal, will help GDP growth, job growth and unemployment reduction.

Without the tax deal, which gave one percentage point to GDP growth and doubled expected job growth to 2.6 million, the economy would have made it through 2011 without a recession. But the additional stimulus boosts economic growth and makes 2011 look much better.

Source: Mark Zandi, Moody's Analytics

Real Estate Owned by banks is increasing again, indicating more homes are coming to market at low prices.

The push to foreclose is a big change from a year ago when banks owning mortgages were slowing foreclosures. The increasing amount of properties on the market will bring down prices and will have a negative impact on the economy.

Source: Mark Zandi, Moody's Analytics

State and local government spending will have to remain flat for the rest of the fiscal year if states are going to balance their budgets.

Odds of a state defaulting are low but for local governments the chance is much higher given weaker house prices, falling property tax revenues, and growing pension obligations.

Source: Mark Zandi, Moody's Analytics

Rescuing Spain would probably exhaust the bailout fund which is making global investors upset and is driving up interest rates.

To prevent higher interest rates European policy makers, especially in Germany and France, need to do more and roll-out a bailout fund closer to $1.5 trillion to assure investors they will get the money they invested in European sovereign debt back.

Source: Mark Zandi, Moody's Analytics

China's economy is now operating near or above its capacity and if it did have a hard landing the U.S. would be in trouble.

Chinese authorities are responding to rising inflation numbers by raising bank reserve requirements, tightening lending standard and installing a policy of gradual currency appreciation. The threat is a Chinese hard landing, which could take down the global economy.

Source: Mark Zandi, Moody's Analytics

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