Posts filed under “Economy”
Did that title get your attention? Its barely an exaggeration:
We’ve discussed — quite extensively — how stimulus driven this economy has been. Starting with the initial jolt ("The Frankenstein Economy"), the government then moved to throwing everything they had (but The “Kitchen Sink”) at the Economy; all this in the context of a Post-Bubble environment.
The problem with stimulus, regardless of your economic philosophy, is what happens when that stimulus fades away. Things slow down — and worse.
Which brings us to the present "soft patch." Placing that into context is Asha Bangalore of Northern Trust. Banglore makes the intriguing observation about the private job creation between the end of the recession and the beginning of the rate tightening cycle:
"Residential investment outlays have made a sizable contribution to the growth of real GDP in the current business expansion and sales of new and existing homes have soared to set new records. The future of the housing market is tied to employment conditions in the economy. The sluggish performance of payroll employment is the primary reason for the FOMC to take a measured path toward bringing the federal funds rate to a neutral level. At the same time, the performance of the housing market has played a visible role in payroll growth. Employment in housing and related industries (sum of employment in the establishment survey under various categories related to housing industry) accounted for about 43.0% of the increase in private sector payrolls since the economic recovery began in November 2001. The Fed began raising the federal funds rate in June 2004. During the June 2004 and April 2005 period, housing and related industries have accounted for 13.0% of private sector payrolls. The point I am trying to make is that a cooling off the housing market will have an impact via fewer new jobs in addition to other adverse effects. The number of job losses could be significant given the role the housing sector has played in the current recovery."
From 2001 to last month (April 2005) 43.0% of private sector jobs are housing related. That’s astonishing. As if that’s not enough, consider what happened once the Fed began tightening:
Once the Fed began raising rates (June 2004 to present), Real Estate related job creation plummeted 68.2%! During the post-recession – pre-tightening period (11/01-6/04), about half of allt the new priate sector jobs were housing related.
In yesterday’s column ("Don’t Buy the Housing Bubble Propaganda"), I noted how this could all end badly:
"The last, and in my opinion, potentially most damaging factor, is the employment situation. As long as most people are gainfully employed, they will be able to service their mortgage costs. (For those of you who are buying a home you can barely afford, then let me suggest buying mortgage insurance — just in case your main income source falters).
The biggest risk to the housing market is not just rising interest rates — rather, it’s a significant decrease in national employment. Why? It’s not the leverage, but the ability to service the debt that causes problems. A potentially negative scenario is the Fed tightens too far, inducing a recession. Something else goes wrong – theoretically, China stops buying our Treasuries, and that forces the Fed to become a buyer of last resort (think Bernanke’s printing press). Next thing you know, we have hyperinflation, large-scale unemployment, and a housing market off 50%."
I thought this scenario was in the realm of possibility — but not necessarily the most likely outcome. Bangalore’s data suggests it may be more likely than I originally believed.
What does all this mean? Barring a sudden rise in organic job creation over the next 6 to 9 months, this cycle will have run its course — my guess is late 2005/early 2006.
And that’s not good for anyone.
Hat tip to Gary Evans!
Housing Market – Another Information Tidbit
The Northern Trust Company, May 23, 2005
Are we spenders or savers?
Gross references Bear Stearns Economist David Malpass:
"Some say that a flaw may exist not in our national character but in the way the government calculates savings: because the bureau’s method of tallying income and consumption doesn’t take into account structural changes in the finances of Americans, it may systematically understate income and overstate consumption.
For example, income includes wages and salaries, interest on bonds, and stock dividends. But it doesn’t include capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans. Nearly 70 percent of families own homes, nearly half of all households own stocks and mutual funds, and an increasing number of baby boomers are turning to 401(k)’s for income. Those trends, some say, can make a big difference. "The structure of the household portfolio has changed over time," said David Malpass, chief economist at Bear Stearns.
Convinced that Americans aren’t frittering away all their income, Mr. Malpass plumbed the Federal Reserve’s Flow of Funds data, a trove of information on Americans’ spending and saving habits. In 2004, he found that the net worth of all households – their assets minus their liabilities – stood at $48.525 trillion, up 9.6 percent from 2003. Sure, rising home prices helped. "But even if you take out houses completely, it still shows huge savings," he said.
The problem with Malpass’ analysis is that he is taking a mathematical approach to what is essentially a behavioral issue. (Hey, it happens) Call it a rationalization. We tend to see those from both the Bullish and Bullish contingencies, as way to feel comfortable with those ideologies.
Let’s state this another way: As a nation, are we spenders or savers?
It raises a host of issues, some net positive, others more troubling. How does our behavior as consumer impact economic downturns? (It seems to smooth them out, at least recently). Why haven’t Businesses been as spendthrift as Consumers this recovery? (My theory is execs are afraid to see their options go underwater again). And the $64,000 question, how might this low savings rate impact retirees when the Baby Boom generation starts playing shuffleboard?
I believe we are not savers. The fact that so many pension plans, 401ks and IRAs go unfunded is a big clue as to that. (It also reveals how Tax ignorant all too many people are).
But stop for a moment to contemplate this: That people would rather spend their money consuming, rather than put it into a 401K where their employer does dollar-for-dollar matching is proof positive of our savings mindset.
That’s right, as opposed to GETTING FREE MONEY, many Americans still prefer to shop — rather than save.
I’m curious today iof Malpass is correct. So here’s a suggestion for what would be a signifcant and useful analysis: Use Malpass’ methodology for calculating the national savings rate — and then apply it to as many countries we can get data for. I’d like to see a list that includes at least: the U.S., Japan, Great Britain, Norway, Sweden, France, South Korea, Italy, Germany, Australia, Canada, Spain, Israel and South Africa. That’s a short list, but we want it as extensive and complete as possible.
The goal is to determine whether or not, as judged against a planet of our peers, we Americans are — relatively speaking — savers or spenders.
Should be a rather interesting discussion . . .
Is It a Savings Crisis or a Math Error?
By Daniel Gross
NYT, May 22, 2005
Tony Crescenzi had an interesting article on RealMoney this week. In it, he notes that as the housing market soars, it ends up knocking rents lower. After all, why rent if ultra low real interest rates allow you to buy for the same price, and with nearly no money down? So what’s the problem with…Read More