Existing Home Sales
Today’s report that existing housing sales plummeted 27% in July should not come as a surprise.
Consider the fact that we are coming off of the greatest boom-bust credit cycle in world history. The focus of that cycle was residential housing which resulted in massive overbuilding of homes. Now we are seeing the inevitable result of the housing boom — the housing bust which requires the liquidation of this malinvestment.
From 2001 to 2006 housing starts jumped 40%, from about 1.6 million units per year to 2.250 million units per year. That period coincided with a massive expansion of the money supply by the Fed. When the cheap money stopped, the ride ended, and projects that, but for the cheap money were unprofitable, went broke.
The liquidation phase is never pretty but it is necessary for recovery. And that is why the government has been unable to prop up the housing market, except temporarily though tax credits. You can’t push a string as they say, and the inevitable process of liquidation is continuing after the tax credits expired in April.
According to the National Association of Realtors report, demand for existing single-family housing dropped to a 15 year low. The 27% drop was the biggest one-month drop since 1968. Sales dropped 29.5% in the Northeast, 22.6% in the South, 25% in the West, and 35% in the Midwest. June sales figures were revised downward to 5.26 million homes from 5.37 million previously reported. … Continue reading Housing and Jobs: The Underlying Problems Are Re-emerging
Christina Romer resigned as Chairman of the President’s Council of Economic Advisers. According to the Bloomberg story:
Romer, 51, pushed last year for Obama’s $787 billion stimulus package as unemployment rose from 7.7 percent. She quit as a U.S. economic recovery propelled by government spending and financial bailouts show signs of slowing, and unemployment exceeding [...]
The Bureau of Economic Analysis (BEA, a part of the Commerce Department) came out with its long awaited report on GDP for the second quarter and the results show a sagging economy. GDP weighed in at a positive 2.4% growth for Q2, but that is against a backdrop of an upwardly revised Q1 of +3.7%. This is something I have been expecting and it appears that more recent data is declining even more.
It has been my premise that (1) fiscal stimulus would only give a temporary boost to GDP without leaving any permanent economic growth, and that (2) the business cycle is stalling out because the government has thwarted the underlying factors necessary for a recovery.
The headline from the mainstream media has been for the most part that the reason GDP declined from Q1 is that exports have dropped and that imports have risen. In calculating the “national account” the BEA nets out imports and exports: imports result in payments to foreign sellers and exports result in payments from foreign buyers. Rising exports have been largely due to the surging value of the dollar in Q4-09 and Q1-10 as troubles in the eurozone caused institutions to dump euros for dollars. Europe’s troubles caused the euro to decline relative to the dollar and this made U.S. exports more expensive U.S. exports fell off. Further, Europe’s problems caused them to cut back on their imports that hurt not only U.S. exporters but also large exporters like China. As you can see, the euro is starting to turn around as the foreign exchange markets believe Europe is solving its problems. This may help exports if European companies recover.
But the decline in exports is not the real story behind GDP. The real story is the fact that the production cycle is stalling out because of a lack of consumer demand. … Continue reading GDP Sags In Q2 2010
This was reported today in the Wall Street Journal. I have nothing to add to this except: Yikes!
Some excerpts:
One of the nation’s last sources of no money down financing for home loans appears to be making a comeback: Legislation that restores a Department of Agriculture home-buying program is headed to President Barack [...]
President Obama is off pitching his stimulus plan today in Michigan:
The trip, part of a campaign dubbed “Recovery Summer” by the White House, is intended to reassure Americans the U.S. economy is returning to a sound footing in advance of the fall elections. …
On Wednesday, the White House released new data saying a surge in Recovery Act funding had raised economic growth in the second quarter of 2010 by as much as 3.2% and boosted employment by as many as 3.6 million jobs, compared to estimated levels in the absence of the stimulus. http://dailycapitalist.com/2010/07/14/how-to-start-an-economic-recovery/
I wonder if President Obama reads the same data as I do? Aside from the fact that the numbers the White House presented are false, the data are revealing the beginning of an economic slowdown which are clearly contra to the Administration’s claims that the economy is growing. The Fed is clearly worried as shown below in the minutes of its June meeting. In fact they expect years of slow growth. I wonder if Mrs. Romer talked to Chairman Bernanke before she boasted about her fake numbers?
Here is an overview of data that came in just this week that reveals a slowing economy:
… Continue reading Obama Says It’s The “Recovery Summer” But The Fed Says It Will Take 5 or 6 Years
UPDATED
Regular readers of The Daily Capitalist know I think we are headed for a decline in economic growth in 2010 and that the data is starting to show this.
Why isn’t our economy recovering? I ask that question often and have written about it many times. Perhaps a better question is: what needs to happen in order to make our economy grow? I offer some solutions.
There are many problems seen as hindering recovery. Here are the common ones I wish to examine:
- Too much debt encumbering consumers;
- The lack of consumer demand to fuel growth;
- Too much debt encumbering banks; and
- The government’s interference in the economy.
There are a host of other issues that are also important but let me focus on these points and show what can be done to fuel a recovery.
Numbers 1 and 2 (debt/demand) are related.
Our economy is consumer driven and we are reminded over and over again that consumer consumption is 70% of our economy. To put this in perspective, for Germany it is about 57% of GDP.
Our economy is built on consumption which is fine as long as it is supported by real savings, productivity growth, and wage growth. The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values. Personal savings declined to almost zero. Now savings are back up to 4%.
Here is why this is seen as a problem for recovery: PCE will decline as consumers pay down debt and increase savings. Spending drives the economy and the economy will decline.
Is this really a problem?
Saving is a process necessary for a recovery. Consumers are acting rationally to uncertainty and they will give us the signal when they are ready to spend again. About $10 trillion in household net worth was wiped out during the bust. Until consumers see unemployment decrease, wages go up, and their debt go down, they aren’t going to spend anyway.
But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don’t want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity.
While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan.
What does this mean? It means they can’t expand and hire new workers whose spending will take up the slack from consumers who save. The government and the Fed have confused our ability to make economic decisions because they are artificially lowering interest rates.
What can we do to fix this? Savings is the fix. There is nothing that should be done to prevent this from occurring. In the longer term it will prepare the economy for new growth. See No. 4 for why flogging a dead horse is harmful to recovery.
The question is: why can’t we get loans?
… Continue reading How To Start An Economic Recovery
While the data will reflect a normal uneven trend in the coming months, there is a clear indication that the economy is slowing.
The reasons are cyclical as much as a result of a winding down of various government efforts at fiscal stimulation. Manufacturing gains have been a result of some stimulus, but much of it is cyclical, coming from the initial inventory reduction by retailers and wholesalers after the crash as consumer spending tanked, followed by a modest restocking effort driven by normal demand from the 80% of us who are employed. Some it was from stimulus programs such as Cash for Clunkers and the home buyer’s credit. Flattening consumer expenditures will dampen additional manufacturing growth. Without consumer demand picking up, the economy will be flat at best. And add to this sinking demand from Europe and China other developing countries, our exports will flatten at well.
This is something that I have been forecasting since February based on several premises:
- Fiscal stimulus would not create any lasting economic impact.
- A lack of credit.
- A declining money supply.
- Government policies that prevent or delay deleveraging or bankruptcies of malinvested capital.
- Several long-term megatrends that are impacting our economy.
Aside from looking at data releases from government and private sources, I carefully monitor the news and the frequency of positive or negative articles that come from the Wall Street Journal, Bloomberg, the NY Times, and the Financial Times. I tend to ignore what polls of economists say, because if they see data rising they will predict a recovery; if data is declining, they will predict caution and consternation.
… Continue reading Are We Heading Toward A Double Dip?
This recent video from Dan Mitchell at the Cato Institute deals with a very serious issue: the level of government spending and the impact on economic growth. I don’t think I’ve dealt with this enough, although it is implied in much of my work. In this video, Dan discusses the Rahn Curve, which says [...]
David Wessel, I have five words for you: post hoc, ergo propter hoc.
Mr. Wessel is the Wall Street Journal’s chief economics commentator, and is often the face of the Journal on television. He wrote an article recently (“Bailouts Save Day, Win Scorn“) that laments the fact that, despite the fact that the bailouts saved the world, Mr. and Ms. America don’t believe it. In fact, he points out that Americans’ distrust of government and large corporations has grown as a result of the bailouts, something they see as unfair, and an example of cronyism between Wall Street and Washington.
He says in the article:
The world has had a terrifying brush with another Great Depression. Although the recent scare in Europe is a reminder that this isn’t over yet, it looks like we’ve escaped that—in no small measure because of taxpayer-financed bailouts and fiscal stimulus, as maligned and imperfect as they were.
Mr. Wessel is a bright guy, a star of a pro-capitalism newspaper. Yet he makes serious economic and logic errors that are not based on theory or the record. He needs a lesson in economics and epistemology (the science of how we know what we know).
Post hoc, ergo propter hoc is a Latin phrase describing a logical fallacy. The fallacy is: because A occurred and then B occurred, then A caused B. In modern behavioral economics this also coincides with the principle of “confirmation bias,” where you look for data that coincides with your desired conclusion.
There are two fallacies here. … Continue reading Bailouts Didn’t Save Day, Deserve Scorn
This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH
Part 3 of 3
And it is the prospective end to fiscal stimulus that makes the Fed’s abject coddling of Wall Street so feckless. The fact is, what has mainly been going up since last spring, besides the public debt, is various measures of sentiment. The rising PMIs are an example of sentiment trends that are measured on purpose while the soaring S&P 500 index appears to be mainly a sentiment survey by default. In any event, what is not going up much is real measures of Main Street business activity.
The March personal income and spending report shows that private incomes are still stuck deep in recession territory. On the same basis, as I previously reported in Did Washington Save the Economy?, March private-sector incomes (wages, interest, rents, and proprietors earnings) are still $500 billion, or 5.7%, below the pre-Lehman level. Once again, social transfer payments and public sector wages accounted for nearly all the income gain, growing by $27 billion in March compared to a miniscule uptick of $8 billion in private-sector incomes. Indeed, at March’s niggardly rate of gain, private-sector incomes won’t return to third-quarter 2008 levels for another 60 months — March 2015. On the other hand, after another month or so, the governmental transfer payment “make whole” will come to an abrupt halt, meaning that the markets will soon see that the Fed has been pushing on a string all along.
Then the hissy fit will come with a vengeance. Already the recovery “evidence” recently headlined on bubble vision has taken on a thread-bare aspect. Last week, for example, the Fed’s embedded spokesman at CNBC pointed to the “strong” core capex orders for March, which he determined (within five seconds of the release) were up 4%, and then opined that this was surely an omen that new jobs are on the way, too. Had Steve Liesman taken an additional five seconds, however, he might have noted that January orders had been down by 4.4 % from the December level, and that February orders were also lower than the year-end figure by 2.5%.
So what happened in the real world, then, is that first-quarter orders for capital goods excluding defense and aircraft were up a slight 1.1% from the prior quarter. In the realm of second derivatives, however, this figure wasn’t even directionally correct because the fourth-quarter gain had been 3.3% and the third-quarter pickup was 3.4%. More fundamentally, core capex orders during the first quarter were still 17% below peak levels — as well they should be with capacity utilization rates still at the lowest levels since the 1950s. … Continue reading Fed Policy Stealing From Our Future Part 3
This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH
Part 2 of 3 parts
Not surprisingly, the Fed’s first foray into bubble economics between 1923 and 1929 endowed the speculative classes with an immense windfall that self-evidently could not be ascribed to pure market forces. During that six-year period, fully 70% of national income growth went to the top 1% of the population while the bottom 90% got only 15% of the gain.
After the New Deal soaked the rich with taxes and the Fed retreated to a more conservative posture in the immediate post-war period, Mr. Market generated far less egregious distributions of the growth. In the 1960s, for example, the national income pie was whacked up in nearly the opposite fashion, with the bottom 90% getting two-thirds of the decade’s income growth while the top 1% garnered only 10%. Even during the Reagan decade of the 1980s, and notwithstanding the so-called “trickle-down” tax cuts, the top 1% obtained just 40% of the national income growth while a somewhat lesser share went to the bottom 90%.
During the Greenspan/Bernanke bubble of 2002-2007, however, the 1920s windfall to the speculative classes came roaring back: Nearly two-thirds of national income growth accrued to the top 1% while the bottom 90% ended up with comparative crumbs, obtaining just 12% of the gain. And when the figures for 2008-2010 eventually come in, they will undoubtedly best even the Roaring Twenties result: It’s likely that more than 100% of the income gains since 2007 have gone to the speculative classes since the population as a whole will have gone backward.
… Continue reading Fed Policy Stealing From Our Future Part 2
This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH
Part 1 of 3 parts
The zero interest rate policy has disguised the ugly truth our economy faces
We are now well into the second year of green shoots, but in word and deed the Fed remains entombed in the zero interest rate policy (ZIRP). Ultra-low money market rates were allegedly needed 18 months ago to insure that the American people wouldn’t be deprived of the munificent services of Goldie and the Fab Five. Since then, these pillars of prosperity – Goldman Sachs (GS), JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Morgan Stanley (MS), and Citigroup (C) — have together posted $62 billion in after-tax profits.
So why are Fed Chairman Ben Bernanke and his red-helmeted lieutenants still scrambling about with water hoses and fire axes? There’s only one answer that satisfies normal standards: The Fed is terrified that the boys and girls on Wall Street will stage a hissy fit if it doesn’t continue to read them the “extended period” fairy tale at the end of each meeting.
By contrast, there’s certainly no sane macroeconomic reason for a zero-cost federal funds rate. Indeed, given its dangerously over-leveraged condition, no element of the American economy should be incentivized to borrow more money (at 370%, the total debt-to-GDP ratio is already off the historic charts).
The deeply indebted household sector, for example, needs to be squirreling away funds for the day (which is coming soon) when its taxes go up and social security benefits get cut, not relapsing toward a zero savings rate as was evidenced by the March personal income report. Likewise, small business shouldn’t be borrowing (on net) because it’s not done shrinking. The national economy is still vastly over-populated by redundant contractors, strip mall retailers, sports barkeeps, and home-canned pickle entrepreneurs — even though the housing ATM from which this legion of boom-time enterprises briefly suckled is long gone.
Big business isn’t borrowing either (except to term-out existing debt) and for good reason: At a subterranean capacity utilization rate of 70%, it doesn’t need external funding for the tepid level of capex needed to replace asset wear and tear or to fund targeted productivity initiatives. In short, the private economy won’t be “stimulated” by cheap interest rates because credit wasn’t previously rationed by high-priced money. Instead, credit is being liquidated, owing to the heavy burden of existing debt on income-challenged households and businesses.
At the same time, what the national economy does need is far less financial speculation and far more real savings. These objectives, in turn, are prerequisites to sustainable full employment and price stability — the Fed’s ostensible dual mandate. Accordingly, higher short-term interest rates — say in the 3%-4% range — would be far more compatible with the Fed’s mission than its current destructive embrace of ZIRP. And the fact is, ZIRP is incredibly destructive because it gives precisely the wrong signal to key economic constituencies, including speculators, savers, and politicians. … Continue reading Fed Policy Stealing From Our Future
This morning the National Bureau of Economic Research (NBER) came out with the conclusion that it is too early to tell if the recession is over.
The NBER defines a recession as:
A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months [minimum of two months] to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.
In both recessions and expansions, brief reversals in economic activity may occur—a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction.
The NBER:
examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).
One can argue about the proper data to measure but the point of their conclusion is not to forecast but to identify broad trends in the economy. So, to say that they should look at money supply, credit, or U-6 rather than U-3 is not significant in the sense that we all understand that these markers are guesses and approximations, dicta, if you will, rather than “truths.”
Let’s look at this recession in comparison to past cycles (courtesy of the Wall Street Journal).
Our recession is the red line and you will see it is at the bottom of all the others which says something about the breadth of it. The NBER pegs December, 2007 as the commencement date of the current recession. While it shows a bottoming out of GDP after 6 months, industrial output and employment has contracted far more than in the other measured cycles.
While there are many data to look at, and I do comment on this regularly, I think this is a pretty good snapshot of the economy.
In light of the data how does one assess it? … Continue reading Is The Recession Over?
The unemployment rate remains unchanged as of today, at 9.7% for the narrow measure of employment (U-3). The broader measure of unemployment, U-6, a measure of long-term unemployment increased from 16.8% to 16.9%. See the definition of U-6 unemployment at the bottom of the table, below.
One positive note was that private payrolls increased by 123,000 workers. I don’t include the 48,000 government Census workers as “jobs” since their wages are just transfer payments. If you discount the Census workers, unemployment would be at 9.8% (the unrounded current number is actually 9.749%). Basically we haven’t improved much over the last year.
Tim Geithner was quoted as saying today, “We’ve made a lot of progress, we’ve got some work to do still and it’s going to take some time to heal the damage.” I don’t know how he can say this in light of the above table. The BLS says right at the top of their release that 15 million Americans are still out of work. More worrisome is the increase in the U-6 percentage. … Continue reading Unemployment Remains Unchanged in March
A private jobs survey came out this morning from ADP which said the private economy lost another 23,000 in March. This was the smallest loss of jobs since February, 2008. Jobs in construction (-43,000) and goods manufacturing (-51,000) were hard hit. Gains came from the service sector (+28,000). ADP’s survey has a base of 22 million workers.
This contrasts with the Wall Street Journal’s survey of economists forecast of a 50,000 job gain. Bloomberg’s survey expects 184,000 jobs, including government jobs, with a big boost coming from temporary Census hiring. The Bureau of Labor Statistics report comes out this Friday. Stay tuned.
This made me think about jobs–what they are and how they can be increased.
I read an excellent op-ed piece on Real Clear Markets about the failure of the American Recovery and Reinvestment Act, the $787 billion orgy of Keynesian stimulus. It was written by econ professors, George Bittlingmayer (Kansas), Arthur Havenner (UC Davis), and Thomas Hazlett (GMU–econ and law). Their point is that the bill did nothing to stimulate employment, as advertised, and the new “Jobs Bill” is an admission of their failure.
Counter to the predictions put forward a year ago by the Administration, when it claimed that “more than 90 percent of the jobs created are likely to be in the private sector,” U.S. companies employed 3.9 million fewer workers in January 2010 than they did one year earlier. Public employment bucked the trend, staying constant even as governments contended with sharply reduced tax revenues. While the jobs held by those 22 million public workers helped support many families, the “stimulus” failed to trigger private sector employment growth. …
This implies a price tag, at the median estimate, of about $800,000 per job. These forecast job gains are not permanent, but temporary. The Administration’s January 2009 forecast was that the A.R.R.A. was needed to reduce the path of unemployment for five years, when the unemployment rate – if we did nothing – would decline to the level projected with the “stimulus.” Using this five-year time horizon projects annual costs of approximately $160,000 per job.
Nice work if you can get it.
 Dig a hole and fill it
One would think that the advocates of Keynesian stimulus would admit failure, but like most fundamentalists, they are more interested in doctrine than results. We now see that they are panicking because their policies aren’t working. Paul Krugman recently recommended that we erect a tariff wall against Chinese goods in order to force them to devalue to yuan and make U.S. exports more competitive in the world market. In effect, he is asking us to declare the economic equivalent of WW III. The devastation to the world’s economies would be catastrophic. Wow. But that’s another economic fallacy.
The bills to stimulate the economy are all based on a fundamental economic error and we, our children, and generations of grandchildren will have to pay for it.
Keynesians have a talent for giving a name to things that are often the opposite of what they mean. “Job” is a good example. To Keynes and his followers a job was something that you paid someone else to do. Simplistic and correct, until you think about it. It’s more complicated than that. Keynesian stimulus actually suppresses economic activity and thus employment. … Continue reading Jobs, Recovery, and the Barrista
February results showed that flat income growth caused consumers to tap into their savings to finance purchases of goods and services, which were up only 0.3% MoM. This means that personal savings decreased. These are negative indicators for the economy.
According to the release by the Bureau of Economic Analysis:
Personal income increased $1.2 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $1.6 billion, or less than 0.1 percent, in February …
Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent. In January, personal income increased $30.4 billion, or 0.3 percent, DPI decreased $26.0 billion, or 0.2 percent, and PCE increased $38.5 billion, or 0.4 percent, based on revised estimates.
Real disposable income [i.e., adjusted for inflation] increased less than 0.1 percent in February, in contrast to a decrease of 0.4 percent in January. Real PCE increased 0.3 percent, compared with an increase of 0.2 percent.
Of all the economic analysts that I follow (about a half dozen) only David Rosenberg got the analysis of these numbers right, which is a roundabout way of saying that my analysis coincides with his analysis. My thesis as most of my readers know is that there are long-term trends in the economy and significant among those is increased savings as a result of financial uncertainty and the lack of sufficient savings by Boomers for retirement.
If savings are a main motivation of consumers, and because wages are flat to declining, then a reduction in savings to fund consumer purchases is not a good thing for the economy. It means that as soon as consumers feel they have sufficient income to continue to save, they will do so, and PCE (personal consumption expenditures) will remain flat for an extended period of time.
Look at what drove PCE in February. The largest component was purchases of non-durable goods which is food and clothing (up 0.9%). Without the component of food and fuel (which has been rising in price), PCE was flat. People need food and clothing. And they have to drive and heat their homes. These aren’t exactly elective purchases. The fact that they are dipping into savings is not healthy organic growth of PCE. … Continue reading Consumers Draw Down Savings For Personal Consumption
I try to put the data in the news in perspective for you. One could easily be confused by seemingly conflicting data that we’re bombarded with daily. There are some signs of improvement, but most of these are related to cyclical factors or the remnants of fiscal stimulus.
The most threatening problem is the continuing credit freeze. Large banks have ceased tightening lending standards, but the smaller banks which do most of the small business loans in America are still tightening. Further, businesses aren’t taking on the risk of borrowing more money. They prefer to remain lean.
The other issue is commercial real estate. Nothing has changed here. It’s still a big threat to most small banks. In a footnote to Bernanke’s House testimony on Thursday, in the discussion about the Fed’s exit strategy, the “extend and pretend” rules under TALF for CMBS have been extended for another three months. That won’t help the recovery.
Cyclical factors indicate that unemployment is starting to soften. Firms can only fire so many people at this stage of the cycle in order to stay in business. Durable goods orders firmed up and that appears to be a response to retailer’s orders for consumer goods as the orgy of inventory depletion has run its course. Also, manufacturers are getting great deals on software, computers, and machinery. I don’t expect economic activity to improve substantially. Look for further deterioration starting sometime in Q3 or Q4.
Here’s my analysis of the significant data:
Cash For Homes Has Played Out
Home sales and home prices continue to decline. The National Association of Realtors announced that existing home sales declined 0.6% in February on a seasonally adjusted basis. This is the third straight decline after the tax credit steroid induced bump last Fall. The median home price declined to $165,100, a 1.8% decline. The credit will expire next month and it seems as if all the sales the tax credit induced has been squeezed out of the market.
[T]he Commerce Department said sales of new, single-family homes fell 2.2% in February from January to a seasonally adjusted annual rate of 308,000—the lowest level since records began in 1963.
More troubling is that the supply of homes for sale have risen to 8.6 month from January’s 7.8% supply. Inventory is rising and we still have a looming shadow market. Estimates are that more than 1 out of 4 homeowners is underwater: … Continue reading Notes On February Data: Housing, Credit, and Inflation
The answer to the question is that both countries have been given credit watch warnings by credit rating agencies.
Moody’s issued this warning about the U.S.:
The US needs to make significant government spending cuts or else risk losing its gold-plated credit rating that has made extensive borrowing so affordable, Moody’s Investor Service said late Monday.
The announcement was a sobering warning that the country’s burgeoning debt has weakened the country’s economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.
If Moody’s were to downgrade the country’s rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.
That, in turn, would threaten the country’s ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still. …
“The ratings of all Aaa governments are currently well positioned despite their stretched finances,” Moody’s quarterly Sovereign Monitor reported.
Although it hasn’t yet taken any action to downgrade US ratings, Moody’s announcement will likely rattle investors and decrease investor confidence in US bonds. …
“At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility,” Mr. Cailleteau said in the report.
In it’s report, Moody’s said debt levels in the US were to blame for its threatened economic standing. …
The Obama administration estimates US deficit (the difference between how much money a government takes in and how much it spends) will rise to 10.6 percent of GDP this year, the highest level since 1946. Federal debt (money the government owes lenders) will likely reach 64 percent of GDP.
The US can straighten up its balance sheet – for example, raising taxes and cutting spending – to stave off a downgrade, says Moody’s.
“A key issue is whether governments are able and willing to implement such unprecedented adjustments,” said Mr. Cailleteau, in a statement.
I look in my crystal ball and I see … VAT. See here, here, and here. … Continue reading What Do China and The United States Have In Common?
UPDATED
We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the third part of a three-part series on this topic
Inflation is on the Rise
I think they will panic if they see western economies weaken. They will panic further if real estate prices start to collapse as a result of tightening policies and western economies weaken. The panic will result in more fiscal and monetary stimulus.
This is right out of the Keynesian playbook and the result will feed the bubble, create inflation, and result in more debt. And, since a substantial part of their official “growth” comes from quasi-government entities (local and regional governments, Red Army and other State-run enterprises) which are highly inefficient as a result of top-down dictates from Beijing, much of this spending is just a waste of capital. Japan tried the same thing and it didn’t work for them either.
It is remarkable that Premier Wen can get up and say that China will have 8% growth this year. In light of poor exports, a financial bubble, poor internal demand, and the severe risk from the quasi-government and local government debt bomb, it is unlikely that China will see real economic growth this year approaching that number. Understand that they can claim to have such growth because of how they measure GDP, but it isn’t real.
And they are already seeing inflation. In February consumer prices rose 2.7% YoY, a 16-month high. Producer prices rose 4.3% in January and 5.4% in February. In light of money supply targets, inflation can only grow. The fact that there is an “output gap” has nothing to do with inflation; idle capacity and high inflation are compatible (remember stagflation). The government’s target is to keep it under 3%. No one believes that.
It is clear that, officially, the CPI won’t exceed 3%, but unofficially? There will be no way to know for sure. I doubt they will announce price controls to achieve their goal, but they have the power to do it unofficially by either fudging the numbers or “jawing” prices down, or both. If they attempt de facto price controls, the evidence of such will be shortages of certain commodities.
The Consequences to China and the World
1. China will lead no one out of the recession. Despite what many commentators tell you, China has weak internal consumption and lives on exports. We cannot look to them to be a leader of the world’s economies because they live off of the U.S., Europe, Japan, and other buyers of Chinese products. The U.S. will lead them out of the recession, not vice versa. The only way they can rapidly spur internal consumption is for them to abandon their wasteful planned economy, fully embrace capitalism, and let those who know how to create wealth and jobs do their thing. … Continue reading China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part III
We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the second part of a three-part series on this topic.
China’s Government Tightens Credit
The government is very worried about this bubble and in November they announced new rules to reign in developers:
The new rules … include a minimum down payment of 50% on land purchases from the government. Local-level governments previously asked developers to put down 20%-30% of the value of the land in such deals, analysts said.
The new policy also requires developers to completely pay off land purchases from the government within one year of a sale agreement, with a one-year extension allowed for certain “special projects.”
Developers won’t be permitted to buy new land if they fail to pay off a land purchase in time, according to the statement, which was jointly issued by the Ministry of Finance, the People’s Bank of China, the Ministry of Land and Resources, the National Audit Office, and the Ministry of Supervision.
The new rules also require local governments to fully reflect the proceeds of land sales in their budgets and forbid them from giving discounts to developers or allowing developers to delay payments. …
“Land auctions by local governments will be conducted in a more strict manner than before to meet the central government’s new rules,” said Johnson Hu, an analyst at UOB Kay Hian. “It may not have a direct impact on housing prices, but it sets a tone that shows the government wants to rein in the property market to deter speculation.”
And these moves will hit the economy hard, especially developers:
At the end of August [2009], liabilities exceeded 90 percent of assets at more than 160 developers that have borrowed at least 50 million yuan ($7.3 million) each from banks, the person said. New loans for real-estate development surged 121 percent from a year earlier in the first half to 403.9 billion yuan, according to the People’s Bank of China’s latest quarterly report.
The housing market is starting to cool, but in Chinese proportions:
… Continue reading China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part II
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