Wells Fargo: Florida faces long road

So what can we expect - economically speaking - for the new year? I recently read an interesting forecast from the Wells Fargo Securities Economics Group titled Annual Economic Outlook - 2010. It was nothing if not thorough, so I’ll provide what I hope is a good summary here. You can download the whole thing from www.wellsfargo.com/com/research/economics.

The crucial question for this year is how long the federal government will continue its expansionary economic policies before the ill effects begin to set in, the report said. TARP and the American Recovery and Reinvestment Act are only part of the wild deficit spending in DC. Often overlooked are the unusually large increases in healthcare spending, unemployment insurance, food stamps and Medicaid as more individuals become eligible.

Fiscal year 2010 has already begun, and the official forecast is for a budget deficit of more than $1 trillion.

“The longer the nation delays addressing its unsustainable fiscal path, the worse the day of reckoning. While federal spending has helped fill the gap left by the private sector over the past year, stimulus-induced growth is not self-sustaining; growth artificially pulled forward merely takes away from future growth,” the report said.

But the Federal Reserve will take a very measured approach to withdrawing its support of the economy, the economists wrote.

“After these programs finish, the Fed’s balance sheet should start to slowly shrink as many of the remaining emergency programs naturally run off or are closed down. This will be the subtle beginning of a long ‘tightening’ process. We do not expect that the Fed will be actively working to tighten policy for most of 2010 and will be content to let policy slowly tighten from its unprecedentedly accommodative level.

“However, policy will still be very accommodative by historical standards for the early part of 2010. As we get closer to the end of the year, the Fed will need to begin considering how to tighten monetary policy more rapidly, by either raising the Federal Funds target, shrinking its balance sheet or a combination of both. If the 2002-2004 experience taught us anything, it was that ‘too low for too long’ can be just as damaging as tightening policy too soon,” the report said.

Residential

The extended and expanded tax credit for first-time home purchases will pull demand forward into the first half of 2010 but will then have diminishing returns as the tax incentives end in June, the report said. Housing starts should see a modest boost through April.

“The fundamentals of supply and demand for the housing sector remain extremely challenging. On the supply side, excess supply remains close to two million units. As for demand, potential buyers are being held back by concerns about employment and income prospects on real disposable income. Meanwhile, credit remains more difficult to qualify for and appraisals are much more conservative today,” the report said.

“We do not see the extension and expansion of the first-time homebuyer tax credit as influencing the ultimate timing of a sustainable recovery in the housing market. The demand for new and existing homes will not pick up on a sustainable basis until employment and income conditions improve.”

Economic conditions are not likely to improve enough to start a real recovery in home sales until spring 2011, the report said.

Commercial

“The ongoing correction in commercial real estate continues to hang over the economy as the rising tide of defaults and foreclosures on commercial properties pressure the financial system. The supply and demand fundamentals are still deteriorating. The net result has been a substantial pullback in commercial construction that is expected to carry through next year,” the report said.

Pricing on commercial property topped out in late 2007, the report said. A fall in pricing will continue over the next 18 months in the wake of more distressed property sales.

“Office buildings and shopping centers remain exceptionally vulnerable as employment is still falling and discretionary consumer spending remains on the back burner,” the report said.

While many buyers are waiting for the fire-sale deals that came in the wake of the 1990s’ savings and loan crisis, those aren’t likely to materialize in the same way now, the economists wrote. Federal intervention at various levels means there is less urgency to dump underperforming properties today.

“We expect construction activity to pull back further over the next 18 months, but look for declines to gradually taper off. All property types have seen demand fall substantially, and this will continue to restrain new development,” the report said.

“One offsetting factor has been rising investment in alternative energy projects, many of which will move forward in 2010. We expect non-residential construction to fall 11.9% in 2010, weighing on real GDP growth for the year.”

Florida

Florida’s economic recovery will take longer to gain momentum because it is so greatly dependent on the continued inflow of new residents, the economists wrote.

“Florida saw its first net out-migration since the immediate aftermath of World War II during 2008 and 2009, with residents increasingly relocating to other Sunbelt states, such as Georgia, the Carolinas, Tennessee and Texas,” the report said.

“The primary reasons for the net outflow have been the dramatic increase in housing costs, including the price of insurance and property taxes, as well as the state’s greatly diminished employment prospects, with non-farm employment falling 8.8% over the past two and a half years, producing a net loss of more than 708,000 jobs.”

Some compensation can be seen in the defense and technology sectors, the report said, but the problem of affordability will remain in the long run.

“The oversupply of housing will remain a drag on the state’s economic performance for the next several years, and parts of the state will not see the housing market return to normal for nearly a decade. The glut of houses will produce one benefit, however, and that will be to return Florida back to its historic position of being a relatively inexpensive place for retires and young, college-educated adults to relocate. Population growth will not pick up, however, until the economy improves in other regions and persons wishing to move to Florida can more easily sell their homes on attractive terms,” the report said.

“Longer term, the combination of higher housing and insurance costs, along with higher property taxes, may prevent Florida from completely returning to the inexpensive place to do business that it was in the 1980s and 1990s. This puts the state at a competitive disadvantage in attracting new industry compared to Georgia, Alabama, the Carolinas, Tennessee and Texas.”

The economists called for Florida’s leaders to place greater emphasis on encouraging private investment, thereby enhancing the state’s natural attractions.

“Florida faces a long and difficult road to recovery. It will be years before the hangover from the housing boom goes away. In the meantime, the glut of houses at least helps bring down the state’s otherwise high cost of living. Eventually, the intrinsic qualities that have drawn generations of Americans to the Sunshine State will overcome today’s challenges. The recovery will just take longer than most Floridians would like.”