What Can Derail Our Economy?

Yes, we know that the economy--and by extension the real estate industry--is on a roll. But the good times can't last forever, even if the down cycle ends up less cyclical than in the past. Threats are always on the horizon, and in last week's Feedback Poll, we asked which downward forces would have the most impact--energy prices, interest rates, the war in Iraq or terrorism. Energy was the dubious winner of the race, with a vote of 39%, followed by interest rates, terrorism and the war. Commentator Ray Torto, sees the question a bit differently. Here's why:

"The answer is all of the above, but each one has a different probability. The central issue is interest rates, and all the others get reflected back into that.

"We tell our clients to keep an eye on inflation, wherever it comes from--and it can come from Iraq as easily as from oil. Inflation will affect interest rates, and the big issue there is not that we don't expect rates to rise--most people expect them to rise anywhere from five-and-a-quarter to six. But what if it goes above that expectation? That will derail the economy.

"There are things that can go wrong, but most people's expectations are for an orderly adjustment to some of the imbalances we see in our economy and our world--an orderly adjustment to such issues as Iraq and the over-reliance on oil and even terrorism. If another terrorist incident occurs, it will slow everything down, but as in the past it will be more of a pause than a derailment.

"Naturally, all of these issues make people concerned. Our clients start talking about these concerns and, really, all they're arguing for is for holding more cash in your portfolio. They're not arguing if they should be in real estate or stocks and bonds. They're saying there's more uncertainty so I should hold more cash. And there are folks doing just that because there are trading opportunities when the market goes down.

"We see the economy slowing because consumers can no longer continue to purchase goods at higher than their income-growth rates. Sales have been growing at 6% and income is growing at 4, so that's going to slow. The housing market is also clearly slowing. It's a concern, even though it's more localized, because brokers and construction people and mortgage bankers won't be making money.

"These are all concerns, and I guess you're doing this story because you don't trust happiness. Even though, the economy is moving along rather nicely."