By Jeff Harding.

Every commentator is teasing the positives or negatives of recent data to justify his or her prognostications as to whether or not we are in a recovery. I think most forecasts are worthless because economists forecast the future by assuming what happened last week will happen next week, maybe a little better or maybe a little worse. Very few got it right for this cycle so I don’t believe most of them now.

Having said that, I have analyzed recent data and have come up with an assessment, not a forecast. The difference between me and the other guys is that I know that I’m pretty much guessing. They don’t.

Let’s start from the top.

Ben Bernanke came out and declared the recession to be over:

Federal Reserve Chairman Ben Bernanke said Tuesday that the recession was “very likely over,” as consumers showed some of the first tangible signs of spending again. … Mr. Bernanke, who had become cautiously more upbeat in recent weeks amid signs of third-quarter growth, said for the first time that forecasters agree “at this point that we are in a recovery.” … The rebound, he added, would likely be so moderate it wouldn’t produce many jobs.

This, coming from the world’s most powerful central banker, is what is called a “ringing endorsement.”

Far be it from me to question the Chairman, but forecasters don’t agree at all. If one expects GDP to bounce back to pre-crash levels, then the recession is not over. I have written about the fact that fiscal stimulus will have an impact on the economy in Q3 and Q4. But when the stimulus stops, the economy will fall back again. I believe that the data points to a bottoming out but the economy just won’t snap back to the good old days.

Let’s look at the data. The numbers are getting better, there is no question about that.

Housing:

It appears as if home prices are bottoming out. While there is a lot of conflicting data every month, the trend is obvious.

The most important piece of housing data is housing inventory. Nationwide, the supply of homes for sale is down to an 8.5 months supply for all product. This is down (by 16.4%) from a high of 11 months which shows that inventory is working its way through the economy. About 31% of sales are foreclosures and short sales which is to be expected. While sales of existing homes were off 2.7% last month, prices are still declining:

The median price of a new house fell 9.5 percent from the prior month, the biggest decrease since records began in 1963, as homes selling for less than $150,000 took a bigger share of the market. The median price decreased to $195,200, the lowest level since October 2003.

The median price nationwide for existing homes was $177,700 in August, 12.5% lower than the same month a year earlier.

People are looking for deals, and, with mortgage rates relatively low, they are finding them. While the reports point to the $8,000 first time home buyer credit as the cause, the major factor driving sales is that prices are down and the affordability index is rising. Not everyone is unemployed. However, if the buyer credit ends November 30, then, obviously, sales will drop off somewhat.

Also there is still a lot of inventory overhang from the shadow market: homes that are in foreclosure (1.2 million) or that are behind in making payments (1.5 million). Ivy Zelman of Zelman research firm Zelman & Associates believes three million to four million foreclosed homes will come on the market in the next several years. This will keep negative pressure on prices.

Don’t look for a rebound in home prices, that will be many years in the making if past cycles mean anything.

Consumer Spending:

Check this poll taken by Bloomberg:

Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.

Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.

Respondents were divided over whether the economy will get better or stay the same in the next six months; only 1 in 6 said things will get worse. More than 40 percent of those surveyed said they feel less financially secure than they did when President Barack Obama took office in January, outnumbering 35 percent who said they feel more secure.

In the poll, conducted Sept.10-14, 40 percent of those questioned said they have experienced one or more problems from the banking crisis. In the most-often cited repercussions, 27 percent said their credit-card interest rates have risen dramatically and 15 percent report that they couldn’t get a home-equity, car, or other kind of consumer loan.

Underscoring consumers’ austere attitudes, 77 percent of respondents said they have cut back on spending during the past year, 59 percent said they have made a bigger effort to pay off debts and 48 percent have put more money aside as savings.

Consumer spending dropped in four of the past six quarters, and is down 1.9 percent from its peak in July-to-September 2007, the biggest retrenchment since 1980.

The Fed’s quarterly flow of funds report said that while household net worth was up 3.9% it was still down almost 19% from the $65.3 trillion peak in the third quarter of 2007. How did households do it? They trimmed their debt by 1.7%, or by about $100 billion. The Fed said home-mortgage debt fell an annualized 1.5% during the quarter. They also cut their borrowing and spending: consumer credit fell at a 6.5% annualized pace after declining 3.7% in the first quarter, the Fed said. The stock market rally also helped.

… Continue reading The Economy in Q3 2009