Detroit Economic Club

Tom Walsh: Economists See Signs of Optimism

date: February 26, 2011
SOURCE:Detroit Free Press

Each time the U.S. economy gains traction, it seems new storm clouds appear.It's an intriguing moment, therefore, against the backdrop of turmoil from the Middle East to Madison, Wis., for high-profile economists Diane Swonk and Mark Zandi to take the stage Monday at the Detroit Economic Club.

Zandi was once described by the Wall Street Journal as "the de facto chief economist to Congress," while Swonk comes to us directly from a true fiscal basket case, the State of Illinois.

I will be the moderator for their luncheon appearance at Cobo Center, so I spoke to both recently for a preview of their thoughts.

Let's start with some good news for Detroit.

Auto juice, housing jitters

"I'm very optimistic about the auto industry, near term, and that will provide a lot of juice to areas like Detroit after 10 long, painful years," said Zandi, chief economist for Moody's Analytics in New York.

But there will be headwinds.

"At the state and local level," said Swonk, chief economist for Chicago-based Mesirow Financial, "we still have fiscal tightening and ... we're going to see public sector layoffs that are fairly large and going to have to be draconian."

Actually, Zandi and Swonk both foresee moderate economic growth, tempered by continued weakness in housing. But they may take a point-counterpoint approach to Monday's discussion, with one making the sunny case and the other offering a reality check.

On the sunny side, U.S. businesses are very profitable and balance sheets are "as strong as they've ever been," Zandi said. Households are reducing debt and credit quality is improving, which bodes well for auto loans and consumer spending.

Retarding growth rates, however, is what Swonk called the Achilles' heel of the U.S. economy -- the housing market.

Bottom on pricing in sight

"There's a large stock of homes, particularly in cities like Detroit and Cleveland, that are just uninhabitable, that have got to be taken down," said Swonk, a University of Michigan alum and former economist for First Chicago NBD.

"The backlog of foreclosures on the market is still very large and downward pressure on housing prices will persist," she said. "I think they'll bottom by end of 2011 as you get the foreclosures out of the market, but the first half is not pretty."

So what's an investor to do, amid all the political uproar around the world, from the chaos on the shores of Tripoli to budget battles paralyzing the halls of Washington, D.C., and state capitols?

Hide the cash in the mattress?

Hoard gold?

"Whenever I'm asked about gold, I just say I like to wear it," said Swonk.

Zandi doesn't like the near-term outlook for fixed-income investments, but expects stocks to generate single-digit returns.

Want to hear more? Show up for lunch on Monday.