NQ First Responders – Economic News

I’ve been hearing more and more guardedly optimistic talk about the economy lately, so when I heard the latest jobs information (basically we’re still losing jobs at a fast rate), I really wondered. Here are three economy-related items you may find interesting: the latest from Nouriel Roubini, who says things are worse; a story about Californians getting paid in script and the banks who won’t honor it; and Time’s story about how potentially 25% of defaulting homeowners will walk away – is it true or more blame-shifting?

1) If you are interested in the economy or think things are starting to look up, as BO has said, check out the article in Forbes by Nouriel Roubini. I’m no economist, but even I knew the most recent jobs report was an ominous sign. Roubini helps to flesh out what job losses mean to the whole economy. Even if you are lucky enough to keep your job, high unemployment means problems for everyone.

The June employment report suggests that the alleged green shoots are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10% by later this summer–around August or September–and will be closer to 10.5%, if not 11%, by year-end. I expect the unemployment rate is going to peak at around 11% at some point in 2010, well above historical standards for even severe recessions.

Roubini goes on to discuss what kinds of jobs remain and how many people, while staving off unemployment are working part-time or are underemployed. He also says tax rebates from last year were largely saved and consumer spending is way down. With an unemployment rate of 11%, Roubini says the losses in all types of consumer loans will only increase. Housing prices are likely to fall further while housing inventory remains large.

The job market report is essentially the tip of the iceberg. It’s a significant signal of the weaknesses in the economy. It affects consumer confidence. It affects labor income. It affects consumption. It affects the willingness of firms to start increasing production. It has significant consequences of the housing market. And it has significant consequences, of course, on the banking system.

Overall, it’s an extremely weak report and suggests that weakness in the labor markets is going to continue, and that the recession is more likely to continue through the end of the year and the beginning of next year. It also suggests that recovery will be anemic, subpar, below trend. We are still estimating that U.S. growth next year is going to be 1% above the 2009 level, well below a potential growth rate of 3%. This is because there is little deleveraging of households, corporate firms and financial institutions while there is a massive re-leveraging of the public sector with sharply rising deficits and debts as many of the private losses have been socialized.

Deleveraging means people are either paying off or walking away from their debts. At the same time, the government (us) is becoming even more indebted because of spending and because government (us) is absorbing some of those private debts (think GM).

Roubini thinks the recession is likely to be the W version also called “double-dip,” with deflationary pressures for another year or so before inflation comes back.

Interesting read. Well worth your time. Go.

2) What do you do when your paycheck can’t be cashed or when direct deposit isn’t so direct? CA employees are about to find out. The LA Times reports today that some banks won’t honor the state IOUs issued in lieu of real money.

People holding California state IOUs — including taxpayers, vendors and local governments — will soon have a tougher time redeeming them, as most major banks are standing firm on a vow not to cash the vouchers after today.

Many credit unions say they will continue to redeem the IOUs for customers. But without mainstream banks as an option, recipients of the IOUs who need cash immediately could be tempted to sell them at a discount to third-party speculators, including ones popping up on the Internet.

A secondary market for IOUs at the individual level? Holy cow. At this point, the SEC did step in.

Responding to that potential, the Securities and Exchange Commission determined Thursday that the IOUs are securities under federal law, which will generally require anyone trading them for profit to be a registered securities dealer.
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“We agreed to help customers and clients on an immediate basis, but it doesn’t provide an incentive for the state to reach an agreement if we just accept the IOUs through perpetuity,” said Bank of America Corp. spokeswoman Britney Sheehan.

Last week, Bank of America said it would do the state a favor by redeeming IOUs from current customers at full value — but only until today. Other major banks quickly and begrudgingly followed suit.

Sheeesh. CA residents could get a crash course in currency trading.

3) Lastly, Time has a story about a study showing that as many as 25% of defaulters CAN pay; they just don’t CHOOSE to pay their mortgages.

Up to 26% of U.S. homeowners who stop paying their mortgage may be doing so intentionally, not because they can’t make the payments but because they don’t want to put money into a house that’s worth less than what they owe. That finding, from a paper by economists at the University of Chicago, Northwestern University and the European University Institute, raises some doubt about the approach the Obama Administration has taken toward stabilizing the housing market. The current approach focuses on whether or not homeowners can afford their monthly payments, and largely ignores the fact that some 20% of homeowners owe more than their house is worth — a situation known as negative equity, or being “underwater,” which, according to the paper’s findings, may itself trigger default.
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“They can still afford to pay but they decide not to,” says Paola Sapienza, a finance professor at Northwestern University and one of the paper’s authors. “It’s very easy to do this in the U.S.” Even though there are serious consequences to reneging on a home loan — including wrecked credit, not being able to buy another house for years to come, the cost of moving and the social stigma associated with being a person who does not honor one’s commitments — lenders tend not to pursue former homeowners for the money they are owed because of the prohibitive cost of tracking down such people and suing them.

The article talks about when people will willingly default. But some think that number is inflated.

Christopher Foote, a senior economist at the Federal Reserve Bank of Boston, who studied negative equity in Massachusetts during the late 1980s and early 1990s when home prices dropped 23%, argues that most walk-aways are likely driven by the combination of two things: both negative equity and an economic hardship, such as job loss. (See 10 ways your job will change.)

More recently, Foote and his colleagues have studied patterns of mortgage nonpayment, and found that in certain states there is a disproportionate number of people who suddenly stop making payments and never try to catch up. This, they surmise, might be an indication of walk-aways — as opposed to struggling borrowers desperately trying to stay in their homes, making payments when they can. The states with more sudden stops are California, Florida, Nevada and Arizona — places where property prices have plummeted and more than 30% of homeowners are underwater. “That’s consistent with the idea that there should be more walk-aways in those states,” says Foote. “But outside of those states, I would think that walk-aways are more rare than people think.”

Walk-aways are becoming legend when discussing the economy, as if every third person under water just sends the house key to the bank. If the stories increase and government and businesses become convinced homeowners are increasingly likely to walk away, you’ll see more pressure for legislation against “irresponsible homeowners.” All things considered, I’d bet that any legislation will be beyond overkill.