No Fundamental Change
What is the most important statistic in economics? Yes, that is a trick question. It is the one that signals the end of the recession.
By the time this downturn is over, that number may be the most famous economic indicator of the past generation. But as diligently as it has been sought, it has not yet arrived. In the United States, there are no signs that the recession has even reached a bottom, let alone evinced signs of recovery.
The United States housing market, subprime, prime, foreclosed and abandoned, continues to fall. New home sales in December at 331,000 were 63% below the level of January 2007 and 44% below January 2008. The backlog of unsold homes at current selling rates rose to 12.9 months. Sales of existing homes gained 6.5% to 4.74 million but much of that rise was due to foreclosed properties. December’s existing sales were 26% lower than January 2007 and 3% lower than January of this year. Prices on homes that are selling were 15.3% lower in December than a year earlier; in November the year-over-year fall was 13.6%. The December drop is the largest yearly fall in this series, which originated in 1968. The Case-Shiller study of 20 metropolitan area home prices reported an 18.2% drop in prices year to year in November; in October the decline had been 18.0%, in September 17.4% in January 11%. The slump in prices is still accelerating. Housing starts and building permits were both precipitously lower in December and half what they were at the beginning of the year.
Housing is important for two reasons; first, it is the original component of the asset-backed debacle. Most of those questionable assets remain on bankbooks. As long as housing prices continue to decline so will the mark to market value of those housing assets. Until those securities are removed or their values regain better levels bank lending will remain constrained by the potential for further portfolio losses against which they will have to set aside additional capital. Second and more telling for the future recovery, consumers are on strike. If the value of their major asset is still falling, there is little likelihood that they will return to the stores and dealerships to buy plasma screens and cars. Even if job concerns were not a present and growing danger, adding an additional burden, consumers would be reluctant to spend without at least a bottom in the housing market.
American GDP in the fourth quarter contracted 3.8% annually but that number conceals GDP produced by a buildup in inventories. Manufacturers may have not reacted quickly enough to the recession and cut sufficient production to keep pace with collapsing purchases. This overhang of inventory will depress GDP in the first quarter unless there is a pickup in consumption. Without that inventory, GDP would have contracted about 5.1%. Personal Consumption Expenditures (PCE) were down 3.5% in the fourth quarter, even though retail gasoline and heating oil prices were much lower. The drop in gasoline prices effectively gave consumers a boost in income but spending did not rise in response, it sank. PCE also fell 3.8% in the third quarter. US industrial production has also fallen in six of the last nine months to December.
Payrolls shed an average of 510,000 jobs per month in the last quarter. The unemployment rate is 7.2% and will likely rise to 7.5% on Friday; a year ago, it was 5.0%. A 50% increase in twelve months will discourage even the hardiest mall shoppers. Consumer Confidence, the Chicago Purchaser’s Index and the ISM surveys are all at or near all time lows.
When improvements in statistics do occur, the results are still negative. Either the numbers are not quite as bad as expected like fourth quarter GDP or they are small upticks from levels that are overwhelmingly recessionary. Existing home sales registered a 6.5% increase in December but they are still almost a third below their peak. Even the more than 50% drop in pump prices, about the only positive in the economic picture has not translated into consumer spending. A fall in oil or gas cannot offset fear of or an actual lost job. The shock of $147 oil and $4 at the pump will not wear off easily. Consumers sensibly assume oil could return to those levels.
The purpose of this recitation is not to depress readers but to remind that even with markets eager to speculate on recovery they will not do so without evidence. As Alfred P. Doolittle’s Eliza’s father might have said ‘We are willing to recover, we are wanting to recover, we are waiting recover’, but even Mr. Doolittle, sunny optimist that he was, would not do so without a sign. And that sign has not been forthcoming.
FX Solutions LLC
Chief Market Analyst