The Economy & This Rocky Recovery
FORECASTS & TRENDS E-LETTER
The Economy & This Rocky Recovery
IN THIS ISSUE:
1. The Economy is Improving Slowly
2. Other Recent Economic Reports
3. All This Sounds Good, But…
4. How Do We Grow More Jobs?
5. Home Foreclosures Hit Record High
For the most part, the economic reports over the last month or so have been positive. On Friday, April 30, the Commerce Department released its “advance” estimate of 1Q GDP. The number came in more or less as expected, showing a rise of 3.2% (annual rate) in the 1Q, following the gain of 5.6% in the 4Q of last year. The report noted that the gain in the 1Q was primarily the result of increased consumer spending, inventory investment, and non-residential fixed investment (in that order).
Personal consumption expenditures (consumer spending) increased 3.6% in the 1Q, compared with an increase of only 1.6% in the 4Q. It was the best quarter for consumer spending since 2007. Durable goods orders increased 11.3% in the 1Q, compared with an increase of only 0.4% in the 4Q. Services increased 2.4% in the 1Q, compared with an increase of 1.0% in the 4Q.
The fact that GDP growth decelerated from 5.6% in the 4Q to 3.2% in the 1Q is largely attributable to a slowdown in state and local spending during the Jan-Mar quarter, additional weakness in the commercial real estate sector, a slowdown in inventory rebuilding and an increase in imports (which are a subtraction from GDP, unlike exports which are an addition).
The estimated rise in 1Q GDP of 3.2% marks the third consecutive quarter of positive economic growth, following the 5.6% rise in the 4Q and 2.2% rise in the 3Q of 2009. Most economists agree that this means the recession has ended. However, the National Bureau of Economic Research (NBER), the private, non-partisan arbiter of the economy, failed to declare that the recession is officially over at its latest meeting, noting that they are still working to determine the exact month in which the economy hit bottom.
The official NBER numbers say the recession began in December of 2007. In the 4Q quarter of 2007, Gross Domestic Product – the measure of all the goods and services produced in the United States – was $13.39 trillion (annualized rate), according to the Commerce Dept. As the recession struck and then deepened, the size of the US economy shrank. By the 4Q of 2008, US GDP was down 1.86% to $13.14 trillion. That was about $250 billion in lost economic activity. The economy got smaller and smaller in the first half of 2009 with GDP falling to $12.90 trillion in the 2Q. That was a drop of 3.7% from the peak in the economy in the 4Q of 2007, and it represented about $490 billion in lost economic activity.
Most analysts now agree that the economy hit bottom sometime in late 2Q or early 3Q of last year. In the 3Q, the economy expanded by a mere $71 billion according to the Commerce Dept., but at least it was positive. By the 4Q of last year, GDP was back to where it had been in the 4Q of 2008. With the latest report showing +3.2% GDP in the 1Q of this year, the economy has recovered all the ground it had lost since the fourth quarter of 2007 – on paper at least.
Of course, this does not reflect the anticipated GDP growth that vanished when the economy plunged in the last half of 2008 and the first half of 2009. And it does not reflect the fact that unemployment soared during this same period and remains extremely high, as I will discuss later on.
Other Recent Economic Reports
The Index of Leading Economic Indicators (LEI) rose 1.4% in March (latest data available). That marked 12 consecutive months of increases in the LEI and suggests that economic growth should remain positive for the next several months at least.
Perhaps the best economic report in the last several weeks was a surprise jump in consumer confidence in April. The Consumer Confidence Index unexpectedly jumped from 52.3 in March to 57.9 in April. This was well above the pre-report consensus of 53.5.
According to the Conference Board, which maintains the Consumer Confidence Index, consumers’ appraisal of present-day conditions was more positive in April. Those claiming conditions are “good” increased to 9.1% from 8.5%, while those claiming business conditions are “bad” declined to 40.2% from 42.1%.
However, some analysts are questioning the validity of the latest consumer confidence number because the University of Michigan Consumer Sentiment Index actually fell in April to 72.2, down from 73.6 in March. Normally, the UM Consumer Sentiment Index tracks closely with the government’s Consumer Confidence Index.
Another recent poll would also seem to question the latest consumer confidence report. Just 21% of Americans consider the economy to be in good condition, according to an Associated Press-GfK Poll conducted April 7-12. So it remains to be seen if the Consumer Confidence Index will be revised lower in the weeks ahead.
The Commerce Department reported that retail sales rose 1.6% in March. The same report noted that retail sales in the 1Q were up 5.5%, and for the last 12 months, retail sales rose 7.6%. In a related report, the Commerce Dept. noted that personal consumption expenditures (PCE) increased a healthy 0.6% in March, marking the fifth consecutive monthly rise.
On the manufacturing front, the much watched Institute for Supply Management (ISM) Index rose to 60.4 in April, up from 59.6 in March. The manufacturing sector in general has seen a significant improvement over the last year. Remember that any number above 50 in the ISM suggests an economy that is expanding. And factory orders rose 1.3% in March following a revised gain of 1.3% in February as well.
Believe it or not, there was actually some good news on the housing front in the latest reports. New home sales soared 26.9% in March, following four previous monthly declines. New home sales spiked in every region of the United States in March as buyers snatched up properties to take advantage of the new home tax credit of up to $8,000 that expired on April 30. Of course, it will be interesting to see how much new home sales fall now that the tax credits are gone.
Sales of existing homes also rose in March, up 6.8%, following a big decline of 7.2% in February which put existing home sales at a 7-month low. The Commerce Dept. reported that housing starts rose modestly in March, up 1.6% at an annual rate of 626,000 units. February housing starts were revised upward as well.
Unfortunately, not all the news on housing has been good recently – more on this below.
All This Sounds Good, But…
As noted above, most in the economic and forecasting world agree that the Great Recession ended sometime in the second half of last year. The positive economic reports above are a reflection of that. But for a lot of Americans, no matter what the numbers say, the pain of the recession will go on, especially with unemployment likely to remain high for at least a couple more years, if not longer.
Obviously, the negative effects of the recession are far from over. When GDP began to rise again in the 3Q of last year, the US economy kept shedding jobs. Since June of last year, apprx. 900,000 workers have lost their jobs. Even though we are over three quarters into the recovery, the official unemployment rate was still 9.7% in March, even though the economy reportedly added 162,000 jobs that month.
The mainstream media would have us believe that the unemployment situation is getting better. Each week, we get a report from the Department of Labor indicating how many Americans filed for unemployment benefits for the first time. This report is commonly called the Initial Claims report, and it comes out on Thursdays.
On April 29, the media reported that the trend in unemployment was getting better because only 448,000 Americans filed for first-time unemployment benefits the week before. Only 448,000? This was considered good news because it was the first time in several weeks that the number fell below 450,000.
But the fact is, the weekly initial claims numbers have been hovering up and down in a range of 435,000 to 500,000 over the last six months. So no one knows if unemployment is really trending lower. It may well be stuck in a sideways range, and as I will discuss later, there are some possible reasons why the unemployment rate could go higher just ahead. In fact, last Friday’s unemployment number for April jumped from 9.7% to 9.9%.
The unofficial full unemployment rate, the one that includes discouraged workers who have stopped looking for jobs and those who have found part-time work but really want to work full time, actually went up in March, to 16.9%, from 16.8% in February. In the latest report for April, the total unemployment number rose to 17.1%, some 15.3 million Americans.
Among the 15.3 million unemployed are the so-called “long-term unemployed,” those who have not actively looked for work in 27 weeks or longer, and are not counted in the official monthly unemployment rate. The number of workers out of work for 27 weeks or longer climbed in April to 6.7 million from 6.5 million in March. That means that 45.9% of all the unemployed have been out of work for half a year or more. That was the highest percentage since the government began keeping records in 1948.
The extraordinarily high percentage of long-term unemployed isn’t just a feature of this recession. Labor Dept. figures show that long-term unemployment has been rising over the past 10 years, and that the recent recession only exacerbated this trend that has been visible since the 2001 recession.
Sadly, according to the Congressional Budget Office, apprx. one-quarter of the long-term unemployed leave the work force permanently. Based on the 6.7 million April unemployment number, that means that almost 1.7 million able-bodied Americans are now lost from the job market.
The latest unemployment number for April, which jumped from 9.7% to 9.9%, came as a surprise. Most forecasters expected the number to remain unchanged at 9.7%. The April report showed that the economy generated apprx. 290,000 new jobs last month (including 66,000 temporary Census workers), the best month since March 2006. The March jobs number reported last month was revised upward from 162,000 to 230,000.
So, how did the unemployment rate go up in April? Keep in mind those long-term unemployed people I discussed earlier. With the improvement in the economy, just over 800,000 of those that had not looked for work in the last 27 weeks or longer once again started looking for work in April. These people had not been counted in the official unemployment rate, but now that they are looking for work, they are counted once again. This is the main reason the unemployment rate rose in April to 9.9% which, in this case, is a good thing.
How Do We Grow More Jobs?
While the 290,000 jobs figure for April was a welcome surprise, it is still not high enough to bring down the overall unemployment number. Peter Morici, an economics professor at the University of Maryland, calculates job increases would have to average at least 400,000 a month to return to a 6% unemployment rate by the end of 2013.
Most economists agree that it takes 3% or better in GDP growth to create enough new jobs just to keep up with population growth. Likewise, there is general agreement that GDP growth would have to be around 5% for a full year just to drive the unemployment rate down by just 1 percentage point to 8.7%, which is still too high.
After the last severe recession in the early 1980s, GDP grew at an annual rate of 7% to 9% for five straight quarters, and the unemployment rate plunged from 10.8% to 7.2% in 18 months. No one I read believes we are headed for 7-9% growth in the next year or the year after.
With 1Q GDP having fallen well below the 5.6% rate in the 4Q, most of the sources I trust now believe we’ll see growth of only 2-4% for the balance of this year. Consumers increased spending in the 1Q by the largest amount in three years, +3.6%, but most economists agree that there was a good deal of pent-up demand that is not likely to repeat itself during the balance of this year. Consumer spending may do well to reach a 3% increase this year overall.
Notice in the chart below that consumer spending has rebounded far more slowly coming out of this recession, as compared to what happened near the end of the severe recessions of 1973, 1981 and 2001. [Should you have trouble reading the text in the chart, note that the lowest, thicker line is the current cycle with the slowest rebound in consumer spending.]
There are numerous reasons why consumer spending is so slow to rebound this time around. Obviously, the plunge in home values is a big reason. High unemployment and uncertainty is another. And of course, having been through two nasty bear markets in stocks in the last decade is another reason.
Given the dim prospects for consumer spending, a number of economists now believe it will take until at least the middle of the decade to lower the unemployment rate to a more normal 6% or so. And these projections do not consider that another recession and/or financial crisis will occur in the next 3-5 years.
The bottom line is that we are very likely looking at continued high unemployment for at least the next several years. And it could get even worse if we have another recession and/or financial crisis.
Home Foreclosures Hit Record High
New data show that during the 1Q of this year, foreclosure filings – default notices, scheduled auctions and bank repossessions – were reported on 932,234 properties, a 7% increase from the previous quarter and a 16% increase from the 1Q of 2009. The data was supplied by RealtyTrac, a real estate research firm.
Foreclosure filings were reported on 367,056 properties in March alone, an increase of nearly 19% from the previous month and the highest monthly total since RealtyTrac began issuing its report in January 2005. RealtyTrac warns that we could see up to 4.5 million home foreclosures in 2010.
Homeowners continue to fall behind on payments because they’ve lost their jobs or seen their mortgage payments rise due to an interest rate reset. Many are unable to refinance because they now owe more on their mortgage than their home is worth. It is not surprising that the states with the highest foreclosure rates continue to be those which have been terribly troubled in the past – Nevada, Florida, California, Arizona, Washington and Arkansas.
While there was some tax credit-driven improvement in new and existing home sales in March, the continued glut of home foreclosures will keep downward pressure on home prices, especially given the way banks fire-sale these homes. If we are going to hit over 4 million foreclosures this year, it would not be unreasonable to see median home prices decline again in coming months.
Modified Home Loans Default Anyway
You may recall that the Obama administration earmarked $75 billion of TARP money last year in an effort to stem the tide of foreclosures. The Home Affordable Modification Program (HAMP) has only been able to help a small fraction of troubled homeowners.
Only about 231,000 homeowners have completed loan modifications as part of the foreclosure prevention program through March. That’s only about 21% of the 1.2 million borrowers who requested the information and forms over the past year.
While participation in this relief program has been weak, the results for those who have participated are very troublesome. The US Office of Thrift Supervison reported on March 25 that 51.5% of homeowners that got HAMP relief defaulted on their new mortgages by the end of last year. That same office reported that over the 12 months ended February, 57.9% either defaulted or were at least 30 days late on their reduced mortgage payments.
The number of homes nationwide with mortgage payments at least 60 days late climbed to 2.39 million in the 4Q, up 49.6% from the year earlier period, according to the report. The median price of a US home was $165,100 in February, down 28% from its peak in July 2006, according to the National Association of Realtors.
The problem with the loan modification program, and foreclosures in general, is that millions of Americans are “under water” on their mortgages. Even if the monthly mortgage payments are reduced, many homeowners believe their home value will never recover to what they paid for it, so they just walk away. As noted above, there were over 367,000 home foreclosures in March alone – the largest ever recorded. And as also noted above, total foreclosures are expected to reach 4.5 million for all of 2010.
Even if the latest home sales figures for March were positive, the housing sector is still in deep trouble. This, plus the continued tight credit markets, are among the main reasons the economy is likely to post slow growth for the next year.
This Crazy Stock Market!!
As most of you are aware, the stock markets experienced one of their most volatile days ever last Thursday, May 6. At one point that day, the Dow Jones Industrial Average plummeted almost 1,000 points in short order, but then recovered sharply to close down 347.8 points on the day. At the intra-day low, this was the largest single day point decline in the DJIA’s history.
All kinds of theories have been advanced as to how this one-day waterfall decline could have happened, and as this is written, we still don’t know exactly why this huge plunge played out. Securities regulators are hotly investigating as this is written, and it remains to be seen if we will ever know the real answer.
But I will give you my initial thoughts, very succinctly. I believe that the global debt crisis is the root cause. I further believe that as global debt continues to rise by unprecedented proportions, market volatility is going to continue to rise. Unfortunately, days like last Thursday may come to be somewhat commonplace in the years ahead. I hope I am wrong, but I fear that I am not.
I will have much more to say about this in the weeks to come. As always, your comments and suggestions are welcomed.
Gary D. Halbert
Obama’s Grand Plan: Bankrupt America (excellent)
The Welfare State’s Death Spiral – Robert Samuelson
Near trillion-dollar bailout of Greece won’t work
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.