By Michele Newbern Gillis
Staff Writer
As our economy heads into the great unknown. many worry and wonder what will happen next. Though it may be scary and uncertain, there is a good chance we will survive.
That was the main message from Dr. Sean Snaith, the director of the Institute for Economic Competitiveness of the College of Business Administration at the University of Central Florida, who spoke last month to the Commercial Real Estate Women of Jacksonville at their meeting held at the Jacksonville Marriott.
“‘Here there be monsters’ was a phrase written on old maps to indicate unchartered waters,” said Snaith. “Ancient cartographers didn’t really know what was out there before the great explorers had sort of touched all the four corners of the globe. What was beyond the explored region was a question mark.
“Lots of times on maps, unknown areas were depicted with sea monsters or dragons and it was often written, ‘Here there be monsters’ or ‘Here there be dragons’ because they didn’t know at the time what was out there so the assumption was there was something terrible waiting for them.”
He said he thought that was a pretty good description as to where we are in terms of the United States economy right now.
“It’s a treacherous time to be an economist,” said Snaith. “We are in many ways going into unchartered waters. There are places that we haven’t been before. We don’t know what’s out there.”
Snaith said consumers have done well despite the recent reports.
“I think the consumer has held up a lot better than some people have given him or her credit for,” he said. “We are prolific spenders. One thing we as Americans do well is spend money. Some of the retail data we’ve seen recently suggests that consumers continuing to spend. Maybe not extravagantly, but still spend nonetheless.”
Even so, many feel as if a recession is right around the corner.
“Some people are even invoking ‘The Great Depression’ in their comments about the economy,” said Snaith. “So, there are a lot of claims that ‘Here there be monsters’ as we head into these unchartered territory.”
So, are we in a recession?
Snaith doesn’t know. He said recessions are diagnosed after they happen not while they are actually taking place. But, he does think that a sustained inflation is on its way.
“No one that says they know is right, because there is no way to know,” he said. “Recessions are done in sort of an economic autopsy that occurs 12 to 18 months beyond the period when the recession has actually taken place.”
Snaith said The National Bureau of Economic Research is sort of an economic CSI when it comes to the economy. After the recession ends, it takes all of the data to determine when the recession officially began and when it ended.
He said that last two recessions were in 1990-1991 and in 2001 and they only lasted a total of eight months.
As an economist, Snaith reviews business cycles to try to figure out what is coming next.
“‘Business cycle’ is a bit of a misnomer,” he said. “It’s not like a cycle in physics or in the life cycle. It’s not a heartbeat or a sign wave.
“Sign waves have the same shape and they repeat themselves over and over again.
“A business cycle is a regular occurring phenomenon in the economy, but no two business cycles are alike. They are like snowflakes. The length of the expansion varies, the height of the expansion varies, the length of the contraction and the depth of the contraction varies as well.”
From reviewing business cycles, Snaith said they have learned that good times are lasting longer and bad times are not lasting as long, which indicates that economist and policy makers have learned a lot about what it takes to manage the business cycle.
“They’ve learned what policies best addressed the shortcomings of the economy,” he said. “That is an indication that we’ve learned a lot. I think the Great Depression was actually a bad recession made worse by bad policy decisions, so we’ve come a long way, baby, when it comes to how we manage the economy and how we understand it’s workings.”
Snaith seems to have a different take on the “housing bubble” view of the real estate market. Many say that the real estate boom was caused by mainly speculative ideas, but Snaith said there were real factors involved.
He sees it more of a soufflé (than a bubble) that was made up of real ingredients such as the factors driving the housing market that included the demographics of the country.
“We had 78 million baby boomers in their peak years of homeownership,” he said. “We had a big wave of homebuyers passing through the peak years of homeownership.
“Unemployment was very low. Personal income growth was strong. Mortgage rates were at a 30- or 40-year low. That is a real determinate of housing demand. That’s not speculative. That’s a real factor in driving housing.
“We have all these real ingredients that were combined together in the right manner in just the right environment that allowed a housing market to boom. That’s when the notion of the housing soufflé dawned upon me. It’s different than the bubble in the sense that there were real factors driving the housing market.
“It wasn’t just speculative.”
Snaith said another factor was the innovations in the financial markets including adjustable rate mortgages, interest-only mortgages, reverse cap mortgages and other mortgage options.
So, how is that soufflé now?
“In 2005, it was pretty puffy, fluffy and light and spilling out over the soufflé dish,” said Snaith. “Now in 2008, it a little bit gnarly and it looks like it got burned a little bit around the corners. It hasn’t completely collapsed, but it isn’t as beautiful as it once was.”
He said he does not think that home prices will continue fall until they are at the same level they were prior to the housing boom.
“If that does happen, we are in deep trouble,” he said. “Then that talk about the depression or recession probably is legitimate. But, I don’t think that is the case.”
Overall, after reviewing reports from the Florida Association of Realtors transactions are down and prices are down, but not drastically depending on which part of the state they are in.
“So, we are not really seeing a collapsing bubble here,” he said. “Given the circumstances, the housing sector has held up fairly well.”
Snaith discussed the condominium market is going to take awhile to correct itself.
“We’ve got some pain to endure, particularly in the condominium sector of the market,” he said.
Snaith said changes in these areas could be signs of a recession. He said to watch out for the health of the labor markets, consumer spending, consumer sentiment and business confidence.
“There are some mixed signals coming out of the economy right now,” he said.
photos by Michele Newbern Gillis