The news that have strung the days together this past week seem indicative of a housing recession that has deepened relentlessly. "Worse than expected" is a frequently written phrase these days, a reflection on the idea that the forecasters were too optimistic on their part. One of the other mysteries is the ascending stock market, which has acted as though nothing ever happened during the past two months. As it turns out, this appears to be a "recession rally", cheering any news that add fuel to Wall Street's hopes the Fed will again cut rates to keep the heroin flowing.
This diary is more disconnected than previous ones, less essay-like and more like a commentary that jumps around. Basically, it's just a potpourri of economic news and so forth. We'll see how it goes. Let's venture into this jungle and see what we find.
The main component of this housing recession has been one of mutual decadence. With home sales dropping, home prices dropped afterward. The signals for now indicate the situation is not going to be improving for a long time. Existing home sales are off 15% since January and new home sales have been floored by 43% from the peak in mid-2005. Tacked on to this is the fact that the median home price for newly built houses tumbled at an 8.3% rate last month, the fastest decline since 1970 (37 years.) It was revealed earlier this week that median home prices in general were down 4% from August 2006. The current trends point to the first year-over-year decline in home prices since the Great Depression, an ominous sign indeed. Another three decade plus high is that of commodity prices, which now appear to be on their biggest rise since 1975. This poses a "contradictory" scenario, since it is assumed that eocnomoic growth contributes to inflation. However, inflation is probably more the result of loosened monetary policy, i.e. a Fed rate cut, more than economic growth. Now, more "30-ish" figures? Well, if you insist. Mortgage defaults greater for late payments greater than 60 days were up 30% in August. For anyone who hasn't been totally asleep at the wheel, this seems less than surprising. But as has been pointed out by various diarists, mortgage rates are set to adjust sharply upwards in the first few months of 2008, which should make the housing market even more depressed than it is now by forcing many into foreclosure.
Do you recall at the beginning of the year when "experts" were calling for a 1% decline in home prices for 2007? The crescendoed cries of a deepening housing recession point to at least a double-digit decline in home prices at this point. This is like a sharp pay cut to millions of Americans who used their home equity as disposable income, which is almost certain to be reflected in weak retail sales in the following months. Consumer spending rose 0.6% in August oddly enough, but personal income has grown more slowly now. The rise in spending came out despite lackluster retail numbers and a sharp drop in durable goods orders. We'll see how this turns out later on, as I expect quite a bit of revising somewhere in these numbers.
Interesting is this gradual progression toward negative forecasts, which may have come too late. Views that were once considered out of line are now in the consensus. The credit crunch in particular put the most bullish economists to a rigorous challenge.
Investment bank Goldman Sachs, for instance, has backtracked on its opinions about global growth, now saying that the housing crisis will very likely impact growth in Asia and Europe. This puts to rest the view that the global economy will "decouple" from the American economy, meaning it would have supposedly avoided the old adage, "If the US sneezes, the world catches a cold."
As of now, the American economy is acting like it has one wet match inside of a dark cave. In its endless search for the exits where the light may exist above ground, we stumble further. We become tired, frustrated, and so confused why our solutions don't seem to be working and so panic ensues. Its only reassurance is the flickering lantern it keeps by it side, sparking whenever the numbers seem cynically less than terrible or when there is an unexpected improvement. It is, however, summarized that the darkness outweighs the flickers of light.
The euro is posting its sharpest gains against the dollar in quite a long time. The last I checked (12:30 p.m.), the dollar was dropping at seemingly vertical rates and the US Dollar Index fell below 78, indeed an all-time low. The dollar's light strenghtening and oil's dip earlier this week has been rescinded. To receive 1 euro, you must pay a stark $1.424.* It was around this time last week when it was just $1.40. The year end forecast of $1.45 is looking extremely likely. Oil, meanwhile, is back above $83.**
As I mentioned last month, the latest GDP numbers show a sharp slow down in consumer spending, growing at a 1.4% annual rate in the second quarter. This was no different in the final GDP revision that came out yesterday, indeed the consumer spending component actually declined some from the previous estimate. What is particularly important to note is the fact that the second quarter was prior to the credit crunch that began in late July. In addition, the job growth numbers for June and July were terrible and came before the credit crunch froze the economy this summer. Now the third quarter has only two full days to go. The bulls are still calling for their 2% annual growth rate, but I contend that the weak jobs numbers for July and August (averaging only 30,000 in those two months) signal that the economy probably grew less than 1% this quarter.
From June to August, the average job growth was roughly 44,000, which, as I will show later, strongly predicts a recession. I haven't worked all the calculations yet, but from data going to back to at least 1969, anytime three month average job growth is below 50,000, a recession is imminent. There were no soft landings from 1969 to 2007 where the three month average job growth was less than 50,000. Again, I will show more later (probably once the September employment numbers come out to perhaps get a clearer picture) to demonstrate that a recession has been predicted by the employment numbers.
The employment numbers are often a card the bulls love to play to make the case for a strong economy, but now this same group seems to be backing off of it, instead rummaging for any "good" news whereever it may be found. In actuality, the "good" news is mainly just a lack of more bad news, yet.
In the meantime, they are just numbers in raw form, and it will not be known until a couple months for the general public to truly witness the enlarging impact (negative, that is) of the housing bust.
*As of around 3:00, this has been englarged to $1.4265.
**Again, as of 3:00, oil fell to around $82, but gold is at $750.