Housing and Bernanke: Bleak House?
Hot after yesterday’s report on the ongoing weakness in home prices comes today’s shocking report on the sales of new homes. Just as was the case with the price data there is no way we can put a pleasant gloss on the sales news. It stinks.
Sales of new homes actually dropped in January to a record low level of 309,000. That’s a 11.2% decline, and the lowest level ever recorded in this data series which has been maintained since 1963. To put this in context: most of the pundits were looking for a slight increase.
So what the heck happened?
Nothing.
By which I mean that consumers see none of the recovery seeping through to them. At least not sufficiently to warrant taking on a major new expense. Wages are stuck in neutral and actually eroding slightly in inflation adjusted terms, so there is no impetus for households top upgrade their home. House prices are still weak which has two effects: one is to stop buyers from making a move in the hope that better deals will come along; the second is that people are suspicious that they could buy a new home and then find themselves holding an asset of declining value. Then there is the banking industry’s hibernation and current risk aversion – access to credit is limited to a much smaller pool of potential buyers because credit standards have been tightened so much.
Add all this together and we produce a potentially combustible brew. The populace is in a surly and introspective mood. They see nothing much being done to fix things – Washington’s gridlock is plastered all over the news. They see no improvement in the employment outlook. They see the hope for increased wages ebbing into the future. And they are acutely aware of their diminished asset values: especially the approximately 30% drop in home prices most parts of the country have experienced.
This is all culminates in the development of a fear driven siege mentality and a desire to hoard cash or pay down debts rather than indulge in discretionary spending. This is the Keynesian vision of the ‘paradox of thrift’ being writ large in our contemporary economy.
So the economy is crippled in some key areas.
An important point to recall is that during the grim employment years of the Bush administration, construction was a bright spot. With sales this low and with no prospect of much recovery in sight the outlook for construction will remain bleak. That kicks away the biggest source of jobs we have had over the past decade.
No wonder this recovery is jobless.
Just as the home sales report was released Bernanke was delivering his regularly scheduled update to Congress. His statement was less bullish than expected. To summarize: the recovery is in no way robust, and is yet to reach a self-sustaining level. This means that both fiscal and monetary policies have to remain stimulative. Any tightening now, or in the near future, would be disastrous.
That should pour cold water over the fiscal and monetary hawks who have been beating the drum for tightening. Within the Fed there is a growing faction advocating raising interest rates in order to stave off inflation. Apparently two of the votes at the last FOMC meetingwere cast in favor of a rate increase and the subsequent, and relatively benign uptick in the discount rate can be seen as a sop to that faction. The FOMC is the forum at which Fed policy is developed and voted upon, so there appears to be a growing division at that level about policy priorities. Which is more important: jobs or inflation fighting? The Fed’s official mission is to balance the two, and that balance is beginning to tip towards inflation fighting. In my view that’s a disaster.
The lesson of history is clear: a premature tightening will plunge us back into recession, and possibly even further into depression.
A superficial reading of the economic situation reveals that GDP grew at about a 4% rate over the last six months. But that is entirely specious. The underlying, self-sustained portion of that growth was much, much, slower – maybe in the 1.5% to 2.o% range. That is way too slow to justify either a rate hike or a budget squeeze.
So we need to keep the policy foot firmly on the gas in the hope that consumers perk up later in the year. If the hawks win the debate … then read up on the Japanese experience of the 1990’s and their ‘lost decade’. It may be more pleasant than our outlook.
Bleak house indeed.
Addendum:
Paul Krugman points to Martin Wolf’s comments in today’s Financial Times. The point they both make is that this recovery is getting more, not less, precarious. We need either a big increase in consumer spending, or a surge in investment. Either would boost final demand and get the private sector moving at a sustainable pace. Without either it is very difficult to construct a positive path through the next few quarters. No matter how you spin the outlook there is a gaping hole in the economy that needs filling. The filler has to come from somewhere. Right now it is the government trying to plug the gap. But such support can only last for so long: sometime the private sector – businesses and consumers – have to take up the slack.
Meanwhile, we need more stimulus.
