The economy is downright flourishing compared to a year ago. What was then a monthly loss of 700,000 jobs could be a net gain when employment data is released tomorrow. GDP growth is cooking. Manufacturing is expanding. Productivity is surging. Home prices are rising. Markets have stabilized. Companies like Microsoft (NASDAQ:MSFT), Procter & Gamble (NYSE:PG), and AMD (NYSE:AMD) are posting revenue gains, not just profits manufactured from cost-cutting.
But to say this recovery is fragile is an understatement -- and not just fragile, but in some cases artificial, prone to vanish when stimulus money is removed. Here are nine land mines that could send the economy back down to earth.
1. Shadow housing inventory
Just less than 4 million homes were officially for sale in September. But American CoreLogic estimates another 1.7 million sat in "shadow inventory" -- with owners who intend to sell but are holding off, hoping for a better price down the road. Some of the biggest culprits are banks like Bank of America (NYSE:BAC) and Citigroup (NYSE:C), which don't want to sell foreclosed properties and acknowledge losses. These homes will eventually come on the market, and real estate prices could get crushed anew from an onslaught of supply.
2. Bank crisis, part deux
Earlier this week, official TARP cop Neil Barofsky told Congress, "To the extent that institutions were previously incentivized to take reckless risk through a 'heads I win; tails the Government will bail me out' mentality, the market is more convinced than ever that the government will step in as necessary to save systemically significant institutions." He ain't kidding: The business model used by Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) hasn't changed a lick since the fall of 2008, when it was proven radioactive. Blame moral hazard for that.
3. Populist anger leading to stupid policies
Former Treasury Secretary Hank Paulson once gave a frightening view of how congressmen and -women vote in Washington: "Oftentimes, they may even agree [with me] in private, but because of their constituencies or because of their parties or because of their committee chairmen or because of what the American people think, you know, won't agree in public." When the need to be re-elected sways votes, nothing good happens.
4. Oil
Oil's trek to $140 a barrel in 2008 is often cited as a tipping point that sent the economy into a tailspin. Could even a modest surge from today's price ($77 a barrel) do the same? Nouriel Roubini thinks so. "If oil goes to $100 today, it will have the same effect on the global economy as what $147 oil had [in 2008]," the NYU economist said in November.
5. State and local governments
You think the national budget is a cesspool? The chasms in state budgets can be far worse. And most states are required by law to run balanced annual budgets. How do they get there? Some, like California, are begging for federal bailouts. Plan B likely means taking a machete to spending, which (though necessary) can body-slam a weak recovery.
6. A quick exit by the Federal Reserve
It's no secret that the economy has been juiced by outrageously lax monetary policy. Should the Fed bow to inflation hawks and prematurely yank cash out of the financial system, a modest recovery could evaporate overnight.
7. Washington
You don't need to be a C-SPAN junkie to know that our fearless leaders have become masters of heckling, hissing, howling, and getting precisely nothing done. But there's a lot that must get done right now: financial reform, budget reform, health-care reform, you name it.
8. Market correction vaporizes consumer confidence
Consumer confidence is almost perfectly correlated with the Dow Jones. That's scary, because it means market corrections -- which invariably happen after gigantic run-ups like we've had over the past year -- freak people out to the point of a fetal-position spending freeze. Before long, a healthy correction turns into a self-fulfilling crash fueled by a frozen economy.
And the most important ...
9. We're all out of ammo
The traditional recession-fighting tools are all used up. There's no budgetary room for another monster stimulus package. Interest rates are already at zero. Should we dip back into recession, there's little we could do to fight it. It's called a liquidity trap, and Japan can tell you all about it.
Got any others? Fire away in the comment box below.
