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, sub-prime, prime,
foreclosed and abandoned, continues to fall. New home sales in December at
331,000 were 63% below the level of Jan 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. Decemberâ€™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 bank books.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 Purchaserâ€™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. Doolittleâ€™s Elizaâ€™s father might have said
â€˜We are willing to recover, we are wanting to recover, we are waiting recoverâ€™,
but even Mr. Doolittle, sunny optimist that he was, would not do so without a
sign.And that sign has not been forthcoming.
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