Business Indicators - October 2005

Business Indicators

by R. Keith Schwer

Many pundits who missed the 2000 stock market bubble are now getting press coverage by predicting a housing bubble. The housing market bubble pundits might have a point, however. Many impacts invariably follow an economic event or shock, such as the cascading corporate scandals that followed the overvalued stock market of the 1990s. Moreover, economic shocks usually do not dissipate quickly. For example, Enron is still with us. In short, today’s housing appreciation story may be the aftermath of the high-tech bubble.

Even if the recent housing price appreciation experienced in Nevada and other hot real estate markets is unsustainable, a disruptive economic debacle need not follow. Housing differs from other assets’ characteristics, suggesting the possibility of different impacts from asset over-valuation; and, history rather conclusively shows that similar economic events seldom repeat precisely. Indeed, economic problems have the habit of mutating to mixtures of new factors, much as changing flu strains that require new vaccines annually. Even if speculative housing market problems arise, general adversity in spending, income or jobs need not follow.

Surging energy prices will surely sap the economic vitality of the U.S. and Nevada economies in the months ahead, through a slowdown in consumer spending and lower profits in transportation-related industries. It is hardly clear, however, that slower growth will tip the economy into a downturn; indeed, we see no signs that slower future growth foretells a recession. On the contrary, the latest round of business indicators points to growth and prosperity in the months ahead. Still, future headwinds could create unexpected turbulence. So, finding ourselves in the mid-phase of an economic expansion, the future advantage may fall to those who follow prudent behavior and plans.