Economic Insights

Overall economic activity increased somewhat since the last report across all Federal Reserve Districts except St. Louis, which reported "softened" economic conditions. Districts generally reported increases in retail sales and vehicle sales. Tourism spending was up in a number of Districts. Reports on the services sector were generally mixed. Manufacturing activity increased in all Districts except St. Louis, and new orders were up. Many Districts reported increased activity in housing markets from low levels. Commercial real estate market activity remained very weak in most Districts. Activity in the banking and finance sector was mixed in a number of Districts, as loan volumes and credit quality decreased. Agricultural conditions were mixed as well, with positive conditions reported in Districts from the central and western parts of the country, while negative conditions were reported in the mid and southern Atlantic Districts. Mining and energy production and exploration increased for metals, oil and wind.

While labor markets generally remained weak, some hiring activity was evident, particularly for temporary staff. Wage pressures were characterized as minimal or contained. Retail prices generally remained level, but some input prices increased.

Consumer Spending and Tourism
District reports indicated that consumer spending increased during the reporting period. New York and Cleveland reported that recent sales strengthened, while sales rebounded in Richmond and Kansas City. Slight sales gains were reported in Philadelphia. Retail sales in San Francisco continued to improve, but remained somewhat sluggish on net. In St. Louis several new establishments opened, particularly in the food industry. Several Districts described consumers as somewhat more confident. Businesses were cautiously optimistic regarding future sales: Cleveland, Atlanta, Kansas City and Dallas noted that retailers expect sales to improve during the upcoming months. Sales of home furnishings and electronic goods increased in a number of Districts, while seasonal apparel sales were up in New York, Philadelphia and Kansas City. New York and Minneapolis noted that shopping by Canadians was strong at businesses near the border. Atlanta reported that retailers continued to keep inventory levels lower than normal, and retailers in New York reported that inventories are in very good shape.

Vehicle sales improved in a number of Districts during March. New York, Philadelphia, Atlanta, Chicago, St. Louis, Minneapolis, Dallas and San Francisco noted that auto sales picked up in recent weeks. Cleveland described sales as decent, while sales were steady in Kansas City and mixed in Richmond. Several Districts noted that favorable pricing and credit terms helped lure buyers into showrooms. Dealers in Philadelphia indicated that they expect sales to increase during the next few months.

Tourism conditions also improved during the reporting period. New York, Richmond, Chicago, Minneapolis, Kansas City, Dallas and San Francisco pointed to signs of increased tourism activity. Tourism was described as stable in most parts of the Atlanta District. Hotel occupancy rates were rising in New York, Chicago, Kansas City, and San Francisco. Reports on room rates were mixed: New York and Kansas City noted increases, while Chicago reported rate cuts, particularly at luxury hotels. Managers at mountain resorts in the Richmond District reported that this winter was one of their best ski seasons ever. However, Atlanta noted that corporate bookings remained at very low levels at some high-end resorts.

Nonfinancial Services
Business services were mixed, with some signs of economic recovery. Boston and Minneapolis reported increased activity. Richmond and Dallas were mixed, while San Francisco said demand remained lackluster. St. Louis reported that the sector continued to decline. Advertising and consulting firms in Boston said demand is up substantially from the first quarter of 2009, while an advertising contact in Richmond and professional media services firms in San Francisco characterized sales as flat at low levels. Dallas reported sluggish demand for nontax-related accounting and legal services. Law firms in Minneapolis specializing in debt collections and bankruptcy saw strong demand, while a Richmond property manager noted a large number of repossessions.

Manufacturing
Manufacturing activity increased since the last report across most of the country, with all Districts other than St. Louis reporting increases in orders, shipments, or production. Boston, Cleveland, Chicago, Dallas and San Francisco reported positive results in metals and fabrication. Cleveland, Richmond, Atlanta and Chicago reported increased auto or auto component production. Boston, Richmond, Dallas, and San Francisco saw increased production in electronic, computers or high-technology goods. Chicago and Minneapolis saw increased production of energy-related products. However, for construction-related goods, Chicago and Dallas reported mixed conditions, Boston reported flat activity and St. Louis reported decreases. Overall, St. Louis saw more plant closures than plant openings.

Banking and Finance
Bank lending activity was mixed by category in most Districts. Atlanta, St. Louis and Kansas City saw weaker loan demand across categories, while activity in San Francisco was flat at low levels and Dallas said that demand appears to be stabilizing. Demand for consumer credit decreased in New York and increased slightly in Philadelphia. Most banks in Cleveland reported weak consumer loan demand, although a few contacts saw a slight increase due to seasonal factors. Business and industrial loan volumes decreased in Philadelphia, Cleveland and Chicago and were flat in New York. San Francisco noted continued modest gains in venture capital funding.

Credit standards remained generally unchanged across the nation, while credit quality was mixed. New York, Cleveland and Kansas City reported tighter lending standards for commercial mortgages. In Atlanta several business contacts reported difficulty getting credit. Dallas and San Francisco said standards continued to be tight. New York saw increased delinquency rates for all categories except consumer loans, which were flat. Philadelphia and Richmond saw little change in credit quality, while Cleveland was mixed. Dallas reported that credit quality was either stabilizing or improving, and appeared to have turned a corner. Chicago noted an improvement in consumer and business loan quality, although credit quality for many small firms continued to decline.

Real Estate and Construction
Residential real estate activity increased, albeit from low levels, in most Districts, with the exceptions of St. Louis, where it was mixed, and San Francisco, where it was flat. Contacts in Philadelphia, Cleveland and Kansas City expressed concern about whether sales would continue to grow after the expiration of the first-time home buyer tax credit. New York, Kansas City, Dallas and San Francisco noted sluggish sales for high-end homes. Home prices were stable across most Districts, but decreased in parts of the New York and Atlanta Districts. Residential construction activity increased slightly in New York, Atlanta, St. Louis, Minneapolis and Dallas, but remained weak in Cleveland, Chicago and San Francisco.

Commercial real estate activity was slow across the nation. Notable exceptions were Richmond, which saw an uptick in commercial leasing, and Dallas, where the sector was mixed and might be nearing bottom. In Boston, leasing activity consists largely of renewals, with many renewing tenants leasing less space. Manhattan Class A office rents were down 20 percent to 25 percent year over year. Contacts in Philadelphia, Richmond, Kansas City and Dallas expressed concern that lease concessions from landlords were putting downward pressure on rents. Commercial construction continued to be weak in most Districts. Cleveland saw some development in the energy and industrial segments.

Agriculture and Natural Resources
Districts reported mixed results in agriculture. Atlanta reported that cold weather negatively affected crop conditions. Richmond, Kansas City, and Dallas noted that wet conditions delayed planting, though Dallas also commented that current soil moisture levels will be beneficial for the growing season. Chicago expected a normal planting schedule. Minneapolis and San Francisco indicated favorable weather conditions. The calving season is doing well in the Minneapolis District, but Chicago and Minneapolis noted softening dairy output prices.

Activity in the energy and mining sectors increased since the last report. Philadelphia, Atlanta, Minneapolis, Kansas City, Dallas and San Francisco saw increases in oil exploration. Coal production was mixed in the Philadelphia District and increased in the Kansas City District. In the Minneapolis District, more wind energy projects are planned, and mining activity increased.

Employment, Wages, and Prices
While overall labor markets remained weak, some hiring activity was evident, particularly for temporary staff. Employment in the manufacturing and services sectors in Boston remained relatively unchanged, while very little hiring occurred at major legal and financial firms in New York. In the Richmond District, job cuts subsided at retail businesses, and employment was stable at most other services firms. In Kansas City overall employment levels held steady, but more manufacturers and several energy-related firms planned to increase payrolls. Cleveland, Richmond, Atlanta, and Chicago reported strong demand for temporary workers. A pickup in employment was noted in the manufacturing sector by Cleveland, with little change in staffing for retail, energy, transportation and banking. Atlanta noted that many businesses continued to increase hours worked for existing staff. Minneapolis reported that while labor markets remained weak, some signs of hiring were noted.

Wage pressures were characterized as minimal or contained. In Boston, most firms reported instituting or planning to institute modest wage increases of 2 percent to 3 percent in 2010, while performance bonuses in the services sector were generally down. Richmond reported that average wages edged higher in March in the services sector, but declined slightly in manufacturing. Most companies hiring new workers in the Kansas City District were not offering higher salaries to attract qualified applicants. Dallas reported that just a handful of firms were planning on partially reinstating employer matches to retirement plans or giving small pay increases. In Chicago wage pressures were minimal; however, an increase in health-care costs was noted. San Francisco also reported significant increases in the costs of employee benefits, such as health insurance and pensions.

Retail prices generally remained level, but some input prices increased. Where producers faced cost pressures on inputs, they were largely unable to pass those prices downstream to selling prices, although in Kansas City some manufacturers were considering raising selling prices due to higher raw materials costs. In Boston retail vendor and selling prices were stable. Philadelphia reported that prices of most goods and services have been steady, although there were increased reports of rising prices for basic materials and construction-related products. Apart from rising prices for steel and petroleum-based products in Cleveland, raw materials and product pricing were generally stable. Richmond noted moderate price increases in the manufacturing and services sectors. Chicago reported upward pressure on prices for plywood, industrial metals and petroleum-based fuels. In the Dallas District prices of chemicals and related products rose sharply, primarily due to plant outages. Natural gas prices slipped during the reporting period because of continued high levels of production, low industrial demand and the end of the winter season. Richmond and San Francisco reported increased overseas shipping costs.

If you have any questions, please call me at 401-461-9987

Among the changes: instead of saying the labor market continues to deteriorate, the Committee now says the labor market is stabilizing. The Committee also removed the language referring to businesses bringing inventories into better alignment with sales. This suggests that the Committee appears to believe that inventory re-stocking may indeed take place, instead of being at a slowing pace of de-stocking.

The FOMC reiterated that it is letting some of its liquidity facilities unwind as scheduled. Interestingly, the Committee removed the language that said it would modify the stimulus plans if necessary to support financial stability and economic growth. For those who are queasy over the quantitative easing of stimulus programs, this language points to the gradual and measured reversal of these policies. Quantitative easing and "quantitative un-easing" are not opposites: quantitative easing was designed to allow the Fed to impact broad sectors of the credit markets. Quantitative un-easing is likely to have different impacts on different parts of the credit markets, keeping favored parts of the market (Treasuries) supported while untethering other parts (the junkiest of the junk fixed-income market).

Hollow Dissent
Going into the meeting, there were only a few things we were wondering: would the language about keeping rates low for an extended period of time change? If not, would anyone else join the dissent? The language didn't change, and Thomas Hoenig continued to be the only dissenter. He would like the FOMC to remove the language because he fears that it could lead to financial imbalances.

While we sympathize with Mr. Hoenig's view, the fact is, the Fed is supposed to maintain price stability and high employment. The Fed only worries about "financial imbalances" when it compromises the integrity of the financial system. The Fed is not in the business of popping asset price bubbles. In our view, as long as unemployment stays high, monetary policy will stay loose. That will likely create a lot of volatility in the markets, but generally keep the markets supported.

For those who worry about inflation, that is a battle the Fed will fight if it becomes necessary. Today's fight is against unemployment, not inflation. Considering that the extent of credit contraction has been extreme, we don't think inflation is on the near-term horizon. If credit conditions substantially and abruptly change, then the Fed may need to move into crisis mode. This is an unlikely scenario, though, and the current tools at the Fed's disposal should allow it to dispatch with inflation.

The views expressed are as of March 16, 2010, and are those of Heath Lefort. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the authors and are not intended to be used as investment advice. The views are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund.

Extending the Good News for Home Buyers

Let's first turn to the terrific news regarding the housing stimulus. Earlier this month, the U.S. Congress overwhelmingly passed and the President signed into law new measures to maintain the momentum for a housing market recovery. The home buyer tax credit, originally scheduled to expire at the end of November will now be available through the middle of next year and more potential buyers will be able to take advantage of it. The income limit was also increased and many move-up buyers - not just first-timer purchasers - also will qualify. Furthermore, loan limits will not shrink as was planned for next year; in high-cost areas, the loan limit will remain at near $730,000 in 2010, thereby permitting more consumers to tap into the historically low mortgage rates.

As most of us are aware, the housing market recovery to date has been concentrated in the lower-end starter home segment. While the mid-priced market has begun to show signs of life, it is still far below normal activity. The upper-end remains sluggish. Therefore, enlarging the tax credit to include move-up
buyers will add the necessary "juice" to broaden the recovery. The accompanying increased velocity in home sales will mean more economic activity. Also, even though there may be less impact in the overall net inventory (a person sells before buying so it looks as a "wash" on inventory), the months' supply will fall because of rising sales. Increased sales have the added benefit of making HVCC and appraisal issues less problematic since more comparables will be available.

Adding it all up, home sales are now expected to get a boost by roughly 15 percent next year. Existing-home sales are forecast to post 5.7 million units in 2010 (up from 5 million units in 2009). New home sales will also rise, reaching 550,000 (from 400,000). More importantly, inventory will likely fall to a 6-7 months' supply by the middle of next year. That draw down of inventory means that that there are likely to be modest home price gains. Roughly speaking a 2-5 percent price gain is likely in many parts of the country in the next year.

Rising home values will prevent home prices from overcorrecting even further. Home prices have, indeed, been overcorrecting and have led to sizable destruction in middle-class housing-related wealth. By contrast, stock market and financial wealth have experienced spectacular gains in the past nine months. Despite those gains, however, consumer confidence still continues to tread near historic lows.

Why is there a disconnect between the rising stock market and low consumer confidence? Most middle-class families have the majority of their wealth tied to housing and less to the stock market. So as long as home values fall, then consumer confidence and the broader economy will face challenges. Therefore, housing-focused stimulus measures will help households build up their housing-wealth (again) and lay the foundation for a sustainable economic recovery.

There were those who argued against the home buyer tax credit. They contended that it would be cheaper for the government just to let home values slide by $8,000 (the amount of the credit) because from a buyer's point of view, there is no difference between a $8,000 credit or an equal amount decline in home value. However, a further decline in home value by that amount would have translated into a $700 billion wealth destruction for middle-class home-owning families. Such an unnecessary loss of household wealth would hold back general consumer spending and thereby hinder a broader economic recovery. But with the tax credit extended and expanded, rising home sales will help nudge home values upward rather than continuing to overcorrect. Yes, the tax credit extension will have an impact on the federal budget deficit - around $10 billion. But those monies will be easily recovered as the economy gets a boost in addition to preserving the middle-class wealth.

The commercial real estate market will also benefit, though as always after some lag time. As the economy becomes more fully entrenched in "recovery" mode, employment will start to turn around. Rising employment and recovering consumer wealth will mean an eventual increase in demand for office, retail, and industrial space.

As always, there are some caveats. Despite the very positive news on the housing stimulus, there remain significant risks to the forecast. Mortgage rates will rise from their rock-bottom points as we move into the next year. The Federal Reserve will slowly start the unwinding of its mortgage-backed security purchases. Also, consumer prices will be watched for any sign of accelerating inflation. Bond investors, therefore, will be cautious about lending at such a low rates. The 30-year fixed rate is likely to reach 5.7 percent by the end of 2010 from the current 5.0 percent.

The labor market is another worry. Though anticipated, the rising unemployment rate is a painful reminder that not all is well. The unemployment rate in October zoomed into double digits - 10.2 percent, its highest level since 1983. And the climb is not over yet - look for unemployment to hit 10.4 percent before reversing. With 7 million job cuts in the past two years, the current total payroll employment at 130.8 million is even below the total jobs that existed in 2000. The country has about 25 million more people in 2009 compared to 2000, yet the total number of jobs has remained unchanged. The silver lining is that the pace of job cuts is now less sharp now than in the first half of the year. Still, the jobless rate unfortunately will remain stubbornly high for quite some time. While job creation is expected to turn positive by spring, unemployment will likely be at 9.5 percent by November 2010 at the time of the mid-term elections. A more-than-usual number of elected officials will be voted out.

Despite the risks of rising mortgage rates and rising unemployment, the housing outlook has significantly improved. As the fear of falling home values disappears, that one key negative factor that has held back home sales will no longer be in play. Happier days are ahead.

Sincerely,

Heath B Lefort

Economist-St. John's University

      WASHINGTON (AP) - Senators agreed Wednesday to extend a popular
tax credit for first-time homebuyers and to offer a reduced credit
to some repeat buyers.
      The tax credit provides up to $8,000 to first-time homebuyers
but is set to expire at the end of November.
      Senators agreed to extend the existing tax credit for first-time
homebuyers while offering a reduced credit of up to $6,500 to
repeat buyers who have owned their current homes for at least five
years, said Regan Lachapelle, a spokeswoman for Senate Majority
Leader Harry Reid, D-Nev.
      The tax credits would be available to homebuyers who sign sales
agreements by the end of April. They would have until the end of
June to close on their new homes, said a congressional aide, who
spoke on condition of anonymity because he was not authorized to
publicly discuss the deal.
      Senators were still negotiating the expansion of a separate tax
credit that lets money-losing businesses get refunds for taxes paid
in previous years, providing them with an immediate source of cash.
      Senators in both political parties were hoping to add both tax
provisions to a bill that would give people running out of
unemployment insurance benefits up to 20 more weeks of federal aid.
The Senate could vote on the overall bill as early as Thursday, but
lawmakers were still haggling over several unrelated amendments
Wednesday evening.
      Popular bills like the one to extend unemployment benefits often
attract amendments that would have a difficult time passing on
their own.
      Republicans were demanding that they be given a chance to offer
amendments to restrict federal aid to the beleaguered community
activist group ACORN and on requiring that people receiving
unemployment insurance be processed through E-Verify, an
Internet-based system that employers use to check on the
immigration status of new hires.
      Majority Democrats have refused to add the amendments.

If you have friends and family looking to purchase a home in the 3-6 months, please pass on my contact information. They will receive 350.00 of closing costs and I will guarantee the lowest interest in the market if their financed amount is 200K or higher! You can call me at 401-461-9987 or e-mail me @ hlefort28@cox.net

Today's Mortgage Rates are Historically Low. Today's 30 Year Fixed Mortgage Rate is Nearing 4.75 Percent.

By: Heath Lefort September 1st, 2009: 2:47 PM PST

The benchmark 10 year treasury yield, the leading indicator for today's mortgage rates, continued it's descent today closing at 3.38 down (0.76 %) overall. Today's close marks the yield's lowest level in nearly 2 months. The increase in treasury prices, driving bond yields and today's mortgage rates which move it's opposite down, is credited to investors moving toward the safety of bonds over concerns the stock market rose too quickly on initial signs of U.S. economic recovery. The move to the safety of bonds comes even as manufacturing and home sales data released today supports a current economic recovery.

Today's Mortgage Rates:

Today's mortgage rates research of wholesale lender's shows 30 year fixed mortgage rates as low as 4.875 percent available with zero buy down points. Today's 15 year fixed mortgage rates are available as low as 4.375 percent with zero buy down. Today's 5/1 ARM mortgage rates are available as low as 4.125 percent with zero buy down. Mortgage rates with zero buy down points are also known as par rates. Regular points and fees do apply.

Today's Mortgage Rates Forecast:

Today's mortgage rates forecast is for low rates through the holidays. For the past 2 years mortgage rates have hit their lows over the holiday season. This year may follow the trend according to analyst's most recent forecast. Analysts now predict the 10 year treasury yield, which drives mortgage rates, will descend to 3 flat. Just weeks ago analysts predicted the same yield would rise possibly to 4 by the end of the year and as a result cause a spike in mortgage rates.

Press Release

Release Date: March 18, 2009

For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession.  Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.  The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.  The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.

Mortgage Rates are now in the 4.50% Range!  Please call if you have interest in refinancing your mortgage.  Heath can be contacted at 401-461-9987 or via e-mail @ hlefort28@cox.net

 

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• An emphasis will be placed on the creation of manufacturing, “green,” and environmental technology jobs.
• A $150 billion investment over ten years in next generation biofuel, fuel infrastructure, acceleration of commercially viable plug-in hybrid, commercial scale renewable energy, and beginning the transition to a new digital electricity grid. The Obama Administration's estimated number of jobs created from these various projects totals five million.
• Specific sectors of focus for these projects and training programs will be in the following areas:
  • Clean Technology
  • Renewable Energy
  • Next-Generation Broadband
  • Science and Technology
• Our Take:
  • There is still a level of uncertainty surrounding the specifics of these projects and how quickly they will make a positive economic impact — estimates range from almost immediately to years.
  • It's not unlikely that, just between 2008 and 2009, the US Economy will lose five million jobs (2.6 million were lost in 2008). The five million in additional jobs from these plans, which will occur over ten years, may not actually have a significant impact. Especially when factoring in population and immigration growth.
  • It appears that the obvious beneficiary of these programs are the large, well established alternative energy and infrastructure companies that will provide the research, manpower, and oversight for many of these projects.
  • With Obama vowing to spark a “clean green revolution,” it's increasingly evident that alternative and clean energy will not just be a passing fad, but will become a staple of our nation's strategic landscape.
  • Gaining exposure to this group can be done in a variety of ways, but a diversified approach is probably best, as many of these companies and technologies are too new to saturate your portfolio with just one name. Here are a few closed-end and exchange traded funds to explore:
    • PowerShares Wilderhill Clean Energy (PBW)
    • First Trust NASDAQ Clean Edge US Liquid (QCLN)
    • Market Vectors Global Alternative Energy ETF (GEX)
    • PowerShares Global Clean Energy (PBD)

• As with the rest of the market, many of the pure-play infrastructure companies have dramatically sold off in recent months helping to bring in their valuations to more reasonable levels.
• Obama's plan also calls for heavy infrastructure reinvestments in schools, libraries, and government buildings.
• Additionally, Obama has stated that he would like to embark on a national effort to upgrade the infrastructure of our nation's medical record keeping system, creating a digital database where our records can be stored and referenced — a project which has the potential to help drive down healthcare costs.
• Our Take:
  • As with the rest of the market, many of the pure-play infrastructure companies have dramatically sold off in recent months helping to bring in their valuations to more reasonable levels.
  • Be aware of volatility in this space as the market begins to price in the potential impact of Obama's infrastructure investment plans into these stocks. Also be cautious of chasing these stocks if the market really gets behind them.
  • Though these companies deserve to sell at a premium to the market, be valuation conscious when taking positions in this area.
  • Some of the major infrastructure players that we believe may be worth looking into:
    • SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII)
    • Foster Wheeler (FWLT)
    • Jacobs Engineering (JEC)
    • Fluor Corporation (FLR)
    • Chicago Bridge & Iron (CBI)

What is shaping up as the deepest and longest recession since the 1930s will most likely end in the second half of 2009. 

The ongoing impact of $2 trillion in government stimulus, with other factors such as pent-up consumer demand and returning consumer confidence, will finally lead to a turnaround, and the third quarter of next year will be "better than expected" by many. It's like starting a fire and you're trying and trying to get your flame going and you keep blowing on the flame and all of a sudden it goes 'poof!

I feel that the housing sector will lead the way. One bright note is that the sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out.

Monetary policy should be augmented with fiscal policy

Current monetary policy will help only those households that do not need help - those that have plenty of money and have a stable job. They will refinance, buy homes and consume. It will not help those who are struggling to make ends meet, or have lost their jobs or may soon lose them, because no financial institution is going to lend them money to buy a home, no matter what the interest rate is. It is up to the new administration to help these households through fiscal policy, with government spending that will create jobs.

The current job market is one of the worst in decades, with another 3.7 million jobs expected to be lost next year. That means that job losses in this recession will total 5.5 million, twice as many as were lost in the 1981-1982 recession, the second worst since World War II. I expect the unemployment rate to rise to 8.8 percent by the end of 2009 and to average 8.2 percent for the year. Deflation will also occur. Gross domestic product will decline in the first two quarters before expansion resumes in the third quarter.

Paulsen blamed "fear mongering" by government officials to persuade Congress to pass the $700 billion Troubled Asset Relief Program in the fall for the depth of our problems today. That, he said, "froze everyone in their tracks" and resulted in "economic paralysis."

Factors leading to recovery - and long-term issues it will create

Paulsen predicted confidence will begin to return in the first half of next year, helped by "the consumer who waited to buy a car and is definitely going to need one."

The U.S. government will provide the primary support for the economy in 2009. This will come in a stimulus package from the new administration with infrastructure spending and middle-class tax cuts, plus "natural stabilizers" such as unemployment benefits, food stamps and other welfare payments. The infrastructure spending will be too narrow to help everyone, he said - but the middle-class tax cuts will offer more sustained consumer spending than recent one-time stimulus checks. Savings rates may also rise to 5 percent.

The economists worried about the long-term effects of government spending, likely to result in tax increases and inflation. "The U.S. government has plenty of 'cheap' financing to help the economy forward. This is going to be very expensive and will require higher taxes in the future, but the alternative is even worse. For the foreseeable future, we can expect economic growth to remain anemic - or until markets forget about past mistakes and start building the structure for the next big bubble.

Heath Lefort has his BA in Finance & Economics from St. John's University in Queens NY.  He analyzes and forecasts international, national and regional economic trends with a focus on macro-economic and interest rate forecasting, financial markets, international economics and the overall economy.

Treasurys were little changed Thursday, with benchmark 10-year note yields still at multi-decade lows, as a report showed initial claims for unemployment benefits unexpectedly fell in the latest week.

Ten-year note yields fell 1 basis point, or 0.01%, to 2.65%, the lowest since the 1950s.

Initial claims fell 21,000 to total 509,000 in the week ended Nov. 29, the Labor Department said. However, continuing claims, an indication of the difficulty of finding a new job, increased to the highest since December 1982.

"The claims data are pointing to the hardest landing, at least so far as employment is concerned, since the early 1980s," said T.J. Marta, fixed-income strategist at RBC Capital Markets.

Reports that the government is considering steps to lower mortgage rates also helped out U.S. debt, as investors speculate the government may buy Treasurys directly to lower the yields, which serve as benchmarks for mortgage loans.

Federal Reserve Chairman Ben Bernanke said Thursday that "more needs to be done" to stem foreclosures, including possibly having the government buy mortgages in bulk and refinance them.

Treasurys had moved higher before the jobless claims report, following interest rate cuts by the U.K., the European Central Bank, Sweden, New Zealand and Indonesia.

Shorter-term maturities are under more pressure, as yields are also near record lows.

Two-year note yields rose 3 basis points to 0.92% after touching 0.85% earlier this week, the lowest in at least three decades.