The last time the Dow Jones Industrial Average hit the 14,000 mark, it was the eve of the 2008 housing and financial market collapse that triggered the Great Recession in the United States. This time should be very different.
Barring a complete fumbling of the federal budget in Washington or warfare in a sensitive hotspot such as Iran, the U.S. economy is poised for the first year of solid recovery since the frightening fall of 2008. In stark contrast to the economic conditions leading upto the U.S. financial meltdown, the housing market is emerging as a strong source of economic activity in 2013 and corporations are sitting on mountains of cash, instead of being leveraged to the hilt. Detroit is selling cars again. Even the energy sector is booming, although the country may pay an environmental price in the future for all the fracking going on.
The number crunchers on Wall Street and at university economics departments hate to hear it, but psychology is far more helpful than mathematics in predicting American economic behavior in general and the stock market in particular. Consumers are a driving force in the U.S. economy, and consumers' willingness to spend hard-earned dollars is tied directly to the level of confidence they have in their financial futures. Confidence is also a key factor in decision-making at corporations, the other main driver of the U.S. economy. When CEOs are confident about the future demand for their goods and services, they invest in their businesses, hire workers and increase product inventories. When corporations forecast a gloomy economy, they dig in and down-size to weather the storm.
Fortunately for those of us scratching out a living, the psychological factors affecting the U.S. economy in 2013 are far more favorable for growth and prosperity than they were in 2007. The most significant confidence booster is the housing market, which is showing clear signs of healing after the five years of chaos and depression that followed the housing bubble implosion in 2008. In most regions of the country last year, housing prices rose, home construction increased to pre-Great Recession levels and foreclosure rates fell significantly.
The importance of a psychological boost from the housing market is hard to overestimate.
Housing is the top investment for the majority of U.S. consumers, especially the middle class. Besides the demoralized millions who lost their houses in the Great Recession there are millions more who held on to their homes but endured 50- to 75-percent declines in property values. The upward trends in home prices and home sales are returning value to family nest eggs, and should inspire a willingness to spend among consumers.
And from a purely economic perspective, a healthy housing market has a widespread positive impact on job creation, including increased demand for a host of products from lumber to microwave ovens, job growth in the construction industry, and booming business in the home services sector.
We're on the right track. Now we have to hope there's enough statesmanship in Washington and places like Tehran to keep us rolling.
After peaking at 14,164 points in October 2007, the Dow Jones Industrial Average plunged for a year and a half, bottoming out at 6,547 points in March 2009. /StockCharts.com image
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