Housing often takes a decade to come back after a financial crisis. The current strengthening we’re seeing reflects the heroic efforts of government, such as the $8,000 home buyer’s subsidy. But to say housing is getting back to normal is absurd. The main problem is banks are impaired. Right now, it’s very tough for small and medium businesses to get money, and they account for a lot of jobs. That hurts us in the long run, too, because a lot of meaningful innovation comes from small entrepreneurs.
We may never get back to a national unemployment rate below 5 percent. Unemployment is going to be at least 7 percent, maybe 8, deep into 2011. It’s going to take several years to see unemployment settle at 6 percent.
We’ll have to adjust to this situation, because it isn’t going to change overnight. We’re going to have higher inflation, higher taxes, and slower growth.
Consumers are redefining value to take more careful account of not only what a product or service costs, but what importance it occupies for them and their families. The next new designer handbag is out. Quality, durability, use value, and credible convenience are in. They are also increasingly concerned in the look and feel and character of companies that they buy from.
This is a permanent change - as great a change as we have seen in 50 years. I am rethinking almost all of my own spending habits. There is an abiding satisfaction in realizing that more - of many goods and services - is not necessarily better. And I am settling into a layaway frame of mind: Let me save up the money to buy some great boots.
At a high level, the worst is over for merchants. But there are still hard times to come, and we will see more merchant bankruptcies throughout 2010.
Companies that made staffing cuts in the downturn can be expected to do significant hiring over the next year. Those that maintained their staffs will likely add fewer people.
Regarding the outlook for the stock market, I am modestly optimistic for 2010. There appears to continue to be positive upward momentum in the economy. But stocks are not cheap, and there remains risk of backsliding if the economy turns south. The most likely path is that stocks continue to move up in 2010.
Whether or not now is a good time for investors to buy stocks, it depends on the time frame. If they have a long time frame and won’t need the money soon, the odds favor earning higher returns from equities than either fixed income or cash investments. But because stocks are inherently more volatile, I would not suggest investing in equities money that will likely be needed in the next one, two, or three years.
Here in Boston, the outlook for the investment industry is stable. I think Boston is positioned to continue to be one of the world leaders in investment management.
The semiconductor industry has seen some good signs of recovery, but there is still a lot of uncertainty. The industry will exit the year with positive growth rates, but they are mostly attributable to a rebalancing of inventory after dramatic overcorrections and also due to economic growth outside the United States. While I remain cautious, I do agree that when the economy does turn around, the technology supply chain from electronics to semiconductors will benefit.
Whatever the stimulus is for - broadband, medicine, or transportation infrastructure - the technology sector is a basic element of all industries. The time it takes the technology sector to benefit varies, but it could be relatively fast for some industries and a bit slower but long-lived for others.
In order for investment activity to increase at market-clearing prices, sellers of commercial real estate (in some cases, their lenders) must write-down their investments to reflect the dramatic fall in values over the last 18 months. There has been discussion about the fact that the government has allowed banks to manage their loan losses over time, instead of pressing them to deal with loan losses immediately.
Two distinct buyers are active moving into 2010: The opportunistic buyer scouring the market for very cheap distressed properties with high profit potential, and the core buyer seeking stable cash flow from top-quality properties in Boston’s strongest submarkets as a safe harbor during economic volatility.
I don’t think we’re going to see any new office buildings next year. Market rents have fallen to levels that no longer make new development economically justified.
We must now take a leadership role in slowing the rate of rise of health care expenses. National health care spending for decades has grown 2 percent faster per year than the rest of the economy - a trend that is unsustainable and unaffordable to our society. We must change the way we both practice and pay for health care to control costs and improve quality.
Through payment reform and reform of the delivery system, we can improve the efficiency and quality of care in our state and our country.
As we enter the new year, let us recommit ourselves to creating a health care system that cares for everyone, is affordable, and thoughtfully incorporates the fruits of biomedical research.
