Mixed News
This morning brings more data to support the notion that the worst is behind us. But along with it is evidence of the long road ahead. In other words a typical day for this point in a recession.
- First the good news: consumer confidence, as measured by the Conference Board,jumped quite strongly last month and is now back roughly where it was in September last year. So the glum despondency of the winter months has been lifted. Maybe it’s the prospect of summer? The rise in the confidence index, from 40.8 in April to 54.9 in May, caught most people by surprise and is the fourth largest one month jump in the index’s thirty-two year history. Notably respondents told the survey compilers that they thought jobs were easier to come by than last month. That seems to be more aspirational than factual, nonetheless sentiment will play a key role in resolving our economic ills, so even this will help if it causes people to spend more freely. Still, we should remember that, at 54.9, the index is still very low by normal standards. Readings in the 70’s are more healthy, so we obviously have a very long way to go in order to find consumers truly breathing easily.
- Second: today’s release of the Case-Schiller home price index confirms that house prices are still falling across the country. The index measures home prices throughout the nation and particularly in the top twenty metropolitan districts. All of those twenty districts saw price declines in March, which is the latest available data, with Minneapolis showing a 6.1% drop, the largest ever in any area. The month-to-month price decline was 2.2% nationally, more than anyone expected and shows just how difficult unwinding the housing bubble is proving to be. In fact the year-on-year decline was 19.1%, a record. Sellers are still hoping that the vast inflationary windfall profits the bubble brought them are not going to evaporate entirely, so there remains substantial downward ‘stickiness’ in pricing. It seems difficult for property owners to realize that their gains were on paper and a product of inflation only: selling for ‘less than the home is worth’ is still a common mantra amongst disgruntled sellers. Cities like New York are still experiencing rapid declines – last month’s decline was the largest ever for New York and Detroit – and the backlog of unsold homes will only contribute to the continuance of that trend. Even with mortgage rates at historic lows activity is very poor, with most of that action on distressed properties.
So the news is very mixed. The consumer confidence data points to a possible uptick in spending later in the year. But the housing data is miserable and will cast a long shadow for a while yet. Couple this with the facts that unemployment is still rising, albeit less rapidly, and that foreclosures are still rising as more and more people experience difficulties after a job loss, and the prognosis is still guarded.
All the evidence suggests that the recession will end later this year, but the outlook for next is very weak. The optimists look for things to snap back to normal levels of growth – somewhere between 2.5% to 3% for 2010 as a whole. I think that is too high. The combination of stubborn unemployment levels above 9% next year, and the continued need by most families to reduce their debt levels, doesn’t leave much room for a strong recovery in spending. Add in the weak outlook for business investment and exports and a more likely prospect is for to grow only a little over 1.5%. Given that the population will grow more than that, the implication is that wealth per person will actually fall next year.
That’s not a strong recovery by any means.
We will have to wait until 2011 for strength to re-appear across the board.
