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It is Still the Economy Stupid

By Larry Johnson on May 27, 2010 at 1:56 PM in Current Affairs

Pundits and politicians still don’t get it–we do not have an economic recovery and we are headed for a double-dip recession. Fox News, for example, was spinning like a top today trumpeting the so-called “good” news that new jobless claims “fell”:

In the week ending May 22, the advance figure for seasonally adjusted initial claims was 460,000, a decrease of 14,000 from the previous week’s revised figure of 474,000. The 4-week moving average was 456,500, an increase of 2,250 from the previous week’s revised average of 454,250.

Until the number of new jobs being created exceeds the number being lost by at least 200,000 then we are not getting out of the economic hole. The key to this lies in the housing market. One part of this equation is the sale of existing homes–those sales are accompanied by subsequent purchases of new furnishings, painting, rugs and appliances. Another part is the sale of new housing, which means carpenters, plumbers, electricians, brick layers and supply companies are working. If more houses are being built you will need more laborers.

So how is the housing market going?

It is still in the shitter:

Home prices fell in March from the previous month, a sign of a weakening housing market despite historically low mortgage rates and now-expired tax credits. …

The numbers are especially disturbing because they show that improved sales due to the tax credits didn’t translate into higher prices, said David M. Blitzer, Chairman of the S&P index committee.

“When you loot at recent trends, there are signs of renewed weakening in home prices,” he said in a statement.

In a healthier economy, extraordinarily low mortgage rates would pump up demand for homes. But economists say the job market is too weak and credit is too tight.

Sales of previously occupied homes rose 7.6 percent in April, theNational Association of Realtors said Monday. But the sales were boosted by government incentives that have now expired and economist don’t expect the improvements to last.

The Daily Caller reports that the housing market is on life support and being sustained solely by the Federal Government:

FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners.

“This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”

Further evidence that the system is flashing red and that we are headed back into an economic hole comes from Rick Davis at the Consumer Metrics Institute:

Among our many Sector Sub-Indexes is an indicator that tells us a great deal about how Consumers are viewing their personal financial situation at the current time. The ‘Personal Finance Sub-Index’ is composed of a number of data series, some of which collect transactions that are precursors to default and/or foreclosure activities. The levels of these negative activities are inverted before being included in the ‘Personal Finance Sub-Index’, so that a rapid rise in Consumer transactions with default and foreclosure counseling services, for example, will drive the sub-index down.

Over the last week this Sub-Index reached the lowest level ever recorded, easily surpassing the previous low levels set in late summer 2008 and again in January 2009. The Sub-Index has dropped to numbers that are over 30% lower than year earlier values. Whether this portends a new round of credit challenges for Consumers remains to be seen, but it at least means that some Consumers are trying to be more aware of their legal options concerning their debt obligations. . . .

Overall, our Contraction Watch continues to show that the 2010 contraction in consumer demand is tracking very differently from either the 2006 or 2008 events. In fact the current contraction has not yet formed a clear bottom after 130 days, unlike the two prior events. Our ‘Daily Growth Index’ for our trailing ‘quarter’ indicates a nearly 2% year-over-year contraction now, which is the lowest level recorded since the ‘Daily Growth Index’ fell into net contraction on January 15th, 2010. This would tell us that if a ‘double dip’ is unfolding we should expect it to be relatively mild but potentially prolonged, extending for several quarters.

Liquidity and credit should drive a recovery. But we are going the opposite direction. Our money supply is shrinking, not growing (while our debt is exploding):

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

Bad news: we’re back to 1931. Good news: it’s not 1933 yet. “It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

A contracting money supply inevitably is accompanied by a contracting economy. It the economy is contracting then people are not going back to work. Batten down the hatches boys and girls. Stormy economic seas ahead and the captain of our ship of state is a novice who can’t read a compass or a chart.

  • Docelder

    Here in Tampa many houses aren’t bringing actual replacement cost when they are sold right now. So there is no way housing jobs will come back here until that is fixed. Why would anybody build more houses when a house isn’t worth the cost of the wood, blocks, nails and labor to produce them? But yes, it’s still the economy. Nobody wants to talk about the economy.

  • sowsear

    About a quarter of a mile from where I live, someone has cleared a huge tract of land, getting ready to build a new development. This is not the high rent district, believe me, and even if the houses are in the under one hundred thousand dollar category, I do not know who will be able to buy them.
    Across the street in another similar development, there are for-sale signs on many houses already. And there are no new jobs coming to town either.
    The only group hiring these days is the government, and I don’t mean NYS.

  • elaine

    We should bring our manufacturing jobs home rather than trying to crank up housing when there are so many vacancies.  Housing, like most sectors, is contingent on supply & demand. Currently there’s more supply than demand.

    Certainly we can be more econonmically creative than simply selling real estate to one another. That’s no way to run an economy.

  • helenk

    http://hotair.com/archives/2010/05/27/obamateurism-of-the-day-280/

    Backtrack helping the economy.

    I am coming to visit your work, stay home, do not get paid for the day

    WOMEN WITH INTELLIGENCE AND EXPERIENCE,MEN WHO SUPPORT THEM AND COUNTRY BEFORE PARTY ALWAYS

    PUMAS,BUBBAS,EQUALISTS AND THOSE PEOPLE RULE

  • Kathleen Wynne

    Larry,

    I’m more cynical than you.  I believe Congress does so get it, but they don’t care, because their goal is to break the back of the American economy.  How better to take control of the masses, than to put them in financial dire straits and totally dependent upon the government and their corporate handlers?

    How else can we have a global economy controlled by the few over the many of the new world order?

  • TeakWoodKite

    helenk, I heard that on the news and lstened to several employees say they were punked.

    One more example of BO’s politically challenged tone deaf abilities as a leader. Where they a security risk?

    BO…I here so you can “make sacrifices”. Makes me wonder if Union locals are paying attention.

  • sowsear

    Actually that is the only answer. Without manufacturing, we have no need for workers and nothing to sell. 
    Of course, instead of hiring more bureaucrats, we could be rebuilding our railroads and infrastructure, too. If we had goods to ship, we would need more practrical transportation than gas-guzzling trucks.

  • felizarte

    Major industries are probably gone for good–textiles, clothing, home appliances, small equipment, tools, etc; large companies mostly because of high labor costs in the US.  These companies are targets of unionizing.  Unions today have become uncooperative, and have forgotten that without companies, there will be no jobs to unionize.  Union leaders have been reckless in spending union dues–for lobbying and making risky investments.  Now foolish members of congress want to bail-out union pension funds that were invested recklessly and no longer able to payout the benefits promised to the members.  I believe that public employees who are protected by civil service rules should not be allowed to form unions. Voters should be more vocal about this because the people always end up paying in terms of increased taxes.  Welfare programs should be reviewed yearly and not simply increased every year.

  • TeakWoodKite

    Mr. Johnson, thanks for the post. It is informative and to the point.

    With such big ears he hears so little. The gulf supplies 1/3 of this nations seafood and related industries are going to tank hard.

    It certainly can’t be a good thing for the economy. Bubba Gump never saw it coming.

  • sowsear

    Yes, why else would they want to keep the borders open?  There is no way that our country can possibly sustain the level of prosperity that it has in the past without our having the industry that we had in the past.
    If we are supporting millions of poor people flooding into the country, and our taxes are being siphoned off to pay for wars , foreign aid, and international corporate/financial scams, we are doomed–even without the influx of  so many, some who have no interest in becoming Americans or in keeping our culture as it was in the past.

  • elizabethrc

    Until Fannie Mae and Freddie Mac are brought to task and disassembled, we’ll see a return to the 100% financing of anything that moves in short order. 
    As a realtor, I recently had to give the bad news to a family who got a professional appraisal in October of 2008 on their home.  That home is now worth 10% less, or $603,000 instead $670,000.
    People who need to move are in shock and unless they are buying up, and will benefit from THAT seller’s decreased value, they’re out of luck.
    Thanks Barney Frank and Chris Dodd.  Dodd at least was smart enough to not run again, but Frank’s ego is too enormous, and Massachusetts voters are apparently too stupid to vote him out.  After all, they voted Deval Patrick in as governor!  Nuff said.

  • Diana L. C.

    I agree. Thanks, Larry.  You’ve made me feel not so crazy for expecting the next shoe to fall, so to speak.  I continue to feel very worried about our economy and about my children’s future.

  • elizabethrc

    Until unions are made accountable and members start to realize the inequality of their perks and are willing to give back some of those excesses, unions are going to continue to destroy our economy. 
    It feels like everyone is out only for themselves.  It’s a wonder we were able to defeat the British.  I wonder if we could today.

  • jwrjr

    There is this little economic principle that neither American Businesses nor American government seem to understand.  That being that after you have fired (“laid off”, outsourced) a worker, he or she no longer has the spare money to buy your product.  Add to that the fact that feeding money to a business does not create new jobs.  The only thing that creates new jobs is more customers.

  • sowsear

    My sister just told me yesterday that her husband has taken a new job in VA. They will have to sell their house in So. CA, as soon as school is out and probably at a great loss. I would expect, given the increase in gov. hiring, that houses in VA would be selling even above their normal highs. Right now her husband is working out of a field office in CA, but the company won’t let that go on too long.

  • sowsear

    We had shrimp cocktail for supper last night and I was thinking that the price of shrimp, if it’s available, will be sky high. My husband and I have noticed that grocery prices in general are increasing as fast as they can change the signs.

  • sowsear

    Also hiring more gov. workers who have to be paid by the tax payer doesn’t work out well either.
    Just the other day I saw an article saying that gov. hiring had surpassed private hiring.

    “The trouble with socialism is that you run out of other people’s money”….Now ain’t that the truth?

  • Peggy Sue

    I think about the only thing we can be sure of is that we’re being lied to consistently and deliberately.  I agree with Kathleen: that Congress knows exactly how grim things are.  Why wouldn’t they?  They’ve been in on the heist.  Bailouts and giveaway and backroom deals.  Lobbyists out the gazoo whispering in their ears, making promises, greasing palms. 

    If they admitted their collusion they’d be staring at a guillotine-sharpening ceremony on the National Mall. 

    The numbers are bogus as id the happy talk.  This is all part of the “creative accounting” cycle we’ve been subjected to for years.  I think whatever strategy there is involves keeping the spin going as long as they can. And when it all falls down and the dust clears?  Game over.  And we’re the suckers, again.

    Cynical, much?  Yeah, bigtime.  And I hate being cynical but there you go.

  • TeakWoodKite

    My kite string went from a high 690k to it’s current 360; do the math.
    We did the HAMP and kicked the can down the road and monthly outlay by one third.

    I remember a coastguard buddy I played music with, telling me what it was like to have a 60 foot boat do a complete roll while towing a distressed sailboat in to Humboldt bay. When Mr. Johnson says “Batten down the hatches”, that is what I think of….My friend piloting a costy boat strapped in to the chair and every thing airtight.

    We know where the leaks are coming from in any case. BO is just one more vegtable I can’t afford.

  • beachnan

    Larry, you are spot on about the effect the worsening housing situation has had on our economy.  My husband is in construction and the jobs have almost come to a standstill.  All of his buddies are in the same boat.  Many of them are losing their homes.  I thought the first problem Obama was going to take on when he became President was to make sure people were going to be able to stay in their homes.  We all know how well that turned out.  Come to think of it, what exactly has this man done to help any of us? The short answer–not a damn thing. 

  • socalannie

    We’ve been to graduations every night this week, and the main subject of conversation has been the lack of jobs.  Especially with the young people.  My husband was surrounded tonight by young men asking hiim what can they possibly do to get any kiind of work, anywhere.  Its very sad, I don’t remember it being this bad in my lifetime.

  • Economy

    Larry it is not clearly how much the housing market is impacting or not impacting the economic recovery at this point, but there are plenty of other indicators that point to an economy well on its way back.

    As for your other thesis about the consumer, every weak there are more indicators that the consumer is coming back.


    Consumer Spending in U.S. Probably Increased for Seventh Month

    By Timothy R. Homan, Bloomberg

         Consumer spending, which accounts for about 70 percent of
    the economy, climbed at a 3.5 percent pace in the first quarter,
    the best performance since 2007, the Commerce Department saidyesterday. Purchases are projected to grow 2.6 percent this year
    after falling in 2009, according to economists surveyed this
    month.
         Employers have increased payrolls in five of the past six
    months, culminating in a 290,000 gain in April that was the
    biggest in four years    , according to figures from the Labor
    Department. Employment probably increased again this month, and
    the unemployment rate likely fell to 9.8 percent, according to
    the median estimates of economists surveyed before a Labor
    Department report due June 4.

  • Linda C

     States reigning in spending because of their legal budegetary constraints the net effect of the federal stimulus was a big zero.  The fed spending barely made a dent with the states restriction of spending.  Everyone “warns of the debt”..however if the feds reign in spending then even more jobs are lost.  That results in decrease revenue in the form of taxes which then by default increases the debt.What we don’t need is another Andy Mellon running the economy into the ground as it happened in the 1930′s.
    I wonder what is happening with all the hyper inflation harpies.  Restriciton of the monetary circulaiton results in continued deflation.  The feds already are backing about 95 percent of mortgages in this country.
    Most of the profits reported by corporation were not the result of increased national demand for goods.  Many of the profits were reported by international gains and by selling coproate bonds. With the euro on shaky ground coupled with economic slow down in Europe then the demand for US goods also declines resulting in job loss.  If the euro reaches parity with the dollar, then our goods are less competative compared to European goods in Asian markets, also resulting in more job loss.   Those corporate bonds that everyone has been snatching up will eventually by worth less than the junk they are now.

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