Economist Zandi Changes His Tune, But Keeps it Somewhat Positive

Picture the lone economist, the housing expert, on a stage. It's just him--looking fit, if a bit war-weary, we might add--him, the microphone, a big screen up behind him for his slides, and an audience out there in a darkened ballroom in front of him.

The economist has predicted things would be better by now, and could be expected to be better still just around the corner. He'd cited fundamentals, technicals, incidentals, etc., as to how and why housing would begin its recovery in late 2011 and grow markedly more positive in the year ahead.

Now, though, or yesterday rather, it's just him, and he's deciding to junk his slides altogether and ask his audience directly, "What do you want me to talk about? What question do you want me to answer?"

Silence.

His audience, you see, is a bunch of people from around the country who live in communities and work in marketing and sales support at companies and run households that hardly need an economist to tell them what they know, because they're eating, sleeping, and breathing it. They're living it.

Things have gotten bad. Really bad. Again.

And so what the economist--Moody's Mark Zandi--does is to scrap the slides with the fevers and the bar charts and the visualized data of decline in the fundamentals, the incidentals, and the technicals, and he says, "Let's just talk a bit, why don't we?"

As if to say, "And then it won't be too long before everyone can repair to the bar to sort this all out."

Honestly, what was Mark Zandi to say, just 16 hours before Wall Street would open to what would be a 400-point decline in the Dow and 3%-plus losses in the S&P 500 and NASDAQ?

He said, "The economy is struggling to avoid a double-dip recession," and he put the odds of the economy failing in that struggle at about 40% to 45%.

The reasons for his gloomier-than-then outlook are pretty easy to put one's finger on. Energy prices soared thanks to political risk in the Middle East and North Africa; manufacturing globally stalled out after the Japanese earthquake and tsunami; and companies in the United States stopped hiring, helping to add the 150,000 new jobs a month it takes to keep the economy on a positive track as far as jobs.

Policy--or faulty policy--got the economy into much of the mess it's in right now, believes Zandi, but he also believes that it must be policy--decisive, immediate, and forceful--that goes into play to help the economy in its "struggle" to avoid a double-dip.

Without the benefit of PowerPoint slides to turn to as talking points, Zandi outlined three points of policy that would be necessary to go into effect if the economy has a fighting chance to avoid going into negative territory.

One of them occurred as he spoke, as the Federal Reserve said it would continue an accommodative monetary mode by purchasing $400 billion in long-term Treasurys, a move that would keep borrowing costs low for an even longer period. Zandi believes that when the Fed Open Market Committee meets again in November, there may be even more arrows in the quiver that would amount to even further increasing the size of the Fed balance sheet.

Second policy measure has to do with the Super Committee follow-up and traction on a bipartisan deal toward a fiscally sustainable deficit reduction on the order of $4 trillion over an allotted number of years, with the first $900 million reduction by the November deadline. Zandi believes the political climate suggests this has a "fighting chance" of gaining bipartisan support, but there's plenty of political vitriol that could paralyze the process.

Policy step three, manifest in the president's proposed Jobs Act, is that Congress must bless relief from at least some of the near-term fiscal restraints on the economy--if all the sundowns and triggers play out as currently planned to restrict spending, it would be tantamount to shaving as much as 1.7% from Gross Domestic Product.

Zandi points to a number of pieces of taxation and regulation policy that it will take an act of Congress to change and says that at least some of these proposals need to make headway toward the president's desk to be signed into law.

The good news, Zandi said, promising that he had some "uplifting" to do after depressing his audience yesterday, is that in all ways, after the next nine to 12 months, the economy should make a robust play at recovery. Insofar as governments, corporations, and households have made strides at fixing their balance sheets and reducing debt, the fundamentals are in place for a comeback.

Meanwhile, we've heard tell that a home building company and building products manufacturer investor forum in Dallas produced another whole level of depression that hasn't been quite so palpable since late 2008 or early 2009.

An industry sector that had been so bold as to suggest that it had freed itself of industry cycles that had driven it to boom and bust through so many years has been on its knees, praying for the return of just such a cycle to lift its players from misery.

It's little wonder Zandi threw out his PowerPoint; the slides become artifacts the minute one presses Save as the Vix goes off the charts.

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