Statistical recovery only an economist could love

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Not many people would say that the economy has been recovering for a year already – but many statistics show that it has.

The U.S. has had four consecutive quarters of robust gross domestic product growth.

“Right now we have a recovery that doesn’t feel like a recovery,” said David Twibell, chief investment officer for Colorado Capital Bank.

“This is a statistical recovery. The numbers look great, but they don’t feel great.”

The manufacturing sector is “firing on all cylinders now,” he told the audience at Colorado Capital’s  2010 Economic Forecast at the Antler’s Hilton this morning. The sector has been above the baseline of 50 since August. Since April 2009, numerous other leading economic indicators have been positive.

Nonetheless, most Americans don’t “feel” that the economy has been in recovery because unemployment remains high and the national debt, at $12 trillion, holds the potential to cause future inflation. Right now, inflation is at an annualized 2 percent, which is low. “Usually,” it’s 2.5 percent.

However, there are some “aftershocks” from the recession that could derail the recovery. Potential problems include “shadow inventory” in the housing market – homes that will be put up for sale as soon as the market recovers – mortgage resets, 70 percent of mortgages will move to higher interest rates this year and in 2011, and commercial real estate.

Nationally, commercial market prices have “seen a jaw-dropping decline of 41 percent since October 2007,” Twibell said.

This means that small- and medium-sized banks have $870 billion, or about half of the $1.8 trillion, in commercial real estate loans on their balance sheets.

“There are real solvency issues in banks right now,” he said.

According to economists and government officials, more banks are expected to fail this year than during 2009. Since 2008, 230 banks have failed.

Unemployment is also a hindrance to recovery.

Since 1981, employment recovery has taken longer and longer after each recession.

“If this scenario plays out, it could take not months but years and years to get back (the jobs) we lost,” Twibell said.

Another impediment is consumers. Without an uptick in income, they’re not likely to increase spending, and they can no longer, by and large, borrow money from their homes or banks and credit is still hard to come by. Savings rates are likely to continue and move higher, he said.

The “big kahuna” for the U.S. economy, is, of course, the $12 trillion national debt. The economy is in an artificial period right now, with other countries buying up U.S. Treasury bonds, in order to keep their money safe. But as interest rates move higher, these countries will be unwilling to continue financing U.S. debt at such low rates.

In the short-term, the country is relying on Japan and China to finance its national debt.

Politically speaking, “the more we rely on China to be our funding source, the more leverage we give them,” Twibell said. Several of China’s generals have already suggested that China sell U.S. treasuries as “retaliation” for U.S. political policies. China holds about $800 billion of United States’ debt.

“Over the short run, the U.S. economy is in good shape,” he said. “But we have issues to grapple with which will take time to resolve.

“Our expectations need to be ratcheted down,” Twibell said. “There’s nothing wrong with 2 percent GDP growth – it’s just not what we’re used to.”