Recovery in 2009? I think not

The talking heads are now calling for a recovery in H2 2009. It's always 8-12 months off, isn't it?

I find this to be a very amusing prognostication. Nearly every economic indicator in the last few weeks has been worse than expected, where expected was quite bad already. The real unemployment rate jumped another percent in December to 13.5%.

The economy is like a massive pendulum, it does not stop on a dime. The boost to income (or as Larry Kudlow likes to say, massive tax cut) created by the precipitous decline in crude and gasoline prices has worked its way into the economy, possibly preventing a disastrous shopping season from being the apocalypse, but there isn't much meat left in gas prices, so further boosts to disposable income from gas are not happening.

The first horseman was a decline in home prices. The second horseman was a decline in the stock market based on expectations of declining earnings. The third horseman was the implosion of the credit market and a crisis of confidence.

The fourth horseman will be counter-cyclical tax policies at the municipal and state level being implemented for 2009. Obama can write a $500 stimulus check, but it will simply be gobbled up by states and municipalities, in the form of business tax increases, property tax increases (actual, or phantom increases by eliminating rebate programs), income tax increases, and sales tax increases to fill giant state and municipal budget gaps. Worse, those state and municipality tax increases will be most severe in the states that have been hardest hit, California, Florida, Nevada, Michigan, New York.

Based on historical declines in the housing market and the size of the stimulus package being proposed my expectation is for the housing market to bottom out in H2 2010 and start appreciating in H2 2011. Peak to trough in prior housing busts in California and New York in the 1980's ran for around 40 months (nominal price decreases), with generally flat prices out to 60 months (real price decreases). Another good indicator is when the P/E ratio for housing declines to historical levels, where the P/E ratio for housing is the price:yearly rent ratio. Each housing market has its own historical price:yearly rent ratio, but one can use generalized Case Shiller number for the national level as a proxy