Jobs and Housing Still Fading
It is becoming monotonous to say, but the evidence that growth will be either healthy or sustained is getting fairly weak. The numbers just don’t add up. At the end of last year there was a surge of hope that the economy would chug into life. The data pointed that way even if the signs were limited. We can all recall Bernanke’s reference to ‘green shoots’ – he wasn’t making that up, there were definite signs of a recovery. I argued at the time that he was being to optimistic, and I still am much less of an optimist than many others.
Why?
Because I didn’t believe that the economy was getting enough life to it to justify anything but a very mediocre forecast for 2010. The problem is that when we take away the surge in activity generated by the stimulus and the normal inventory build up that occurs at the bottom of every recession, basic business is fairly weak. It isn’t shrinking, but it definitely isn’t booming.
It is both boring and repetitive to say: we are stuck in a low growth, relatively jobless, period. And we are likely to stay there a while.
Take today’s data:
Jobs
The payroll management company ADP releases its analysis of private company payrolls every month two days ahead of the government’s report on unemployment. Basically ADP tells us what it’s customers are doing: are they adding to or subtracting from the payrolls that ADP processes for them? Since ADP is so large its data provides us with a very good, and very accurate, idea of trends in private company, i.e. non-government, jobs. We have been waiting for the month when ADP would tell us that payrolls are growing again. Unfortunately we will have to wait a while longer for such a month. Today’s report has a drop of 23,000 in March, continuing the trend of shrinkage that set in months ago.
There had been a quiet optimism amongst analysts that the data for March would be much stronger. Many in the media are looking for growth in employment of between 150,000 and 200,000 when the government report comes out Friday. This ADP figure dampens such expectations, and casts quite a pall over the near term outlook.
What seems to be going on is that private companies have built a cost-cutting or cost control mentality into their 2010 budgets. That will mean profits are restored temporarily, but it keeps employment well below the levels we all need it to be for economic growth to get to a sustainable level.
There is an old adage in Keynesian economics that says ‘capitalists earn what they spend’. If we update that saying into a more modern idiom we would say that businesses reap what they sow. Tight budgets make sense in the short run as they help restore profits. But in the longer run they starve the economy of the cash flow it needs to generate the spending that allows businesses to earn profits in the future. So cost cutting today produces lower profits in the future.
The only way out of this downward cycle is an increase in investment. But for companies to justify that investment they need to be able to predict sufficient sales to cover the cost. If demand looks weak -as it does at the moment – then companies would be foolish to invest. Plus banks would be foolish to lend.
The only character in the economy not affected by this sensible approach is the government. This is the classic justification for deficit spending and is the reason we needed the stimulus.
This is all a restatement of what I have said here many times. The reason I remind you of it is that today’s jobs data shows that we still need to keep the deficit high. We need to keep battering away at the cost cutting mentality until it ebbs, and is replaced by a more optimistic ‘growth oriented’ attitude.
This crisis began and will end in the business sector. Consumers have to be induced into buying things. Once they do, business will invest, and the jobs will start to reappear.
What ADP is telling us it that day is still a way off.
House Prices
We have reached a point where I cringe in anticipation of any housing data. Today was no exception. The Case-Shiller home price index was released this morning and showed a continued drop in home prices nationally. The latest data is for January, when home prices dropped another 0.4%. Of the 20 major cities that Case-Shiller reports on only Los Angeles showed any gain in prices, and there the gain was minimal.
The good news is that for the country as a whole the loss decline seems to have slowed to a near standstill: for the last twelve months the decline overall was only 0.7%, which is the closest to zero we have been for three years.
Within that overall figure there were some wide variations: 11 of the 20 major cities showed declines, with Las Vegas leading the way with a 17.4% drop. Las Vegas, Charlotte, Seattle, and Tampa all hit new lows last year and are still declining.
Since the peak of home prices in 2006 they have declined by 32.6% nationally. This phenomenal drop has shattered many household budgets and is a root cause of all our problems. The American national obsession with real estate: the urge to own a home, the huge welfare given to home owners via government subsidy of mortgage costs, and the bias against renting, lies at the center of our crisis. Add in the availability of easy money flooding the economy due to erroneous Fed policies and the trade deficit which sucks in capital from abroad and we produced a recipe for disaster. Which is what we are now digging out from.
Today’s Case-Shiller data shows we still have a very long way to go.
Many of you ask me whether I think housing will recover. Of course it will. The question is timing and amount. I doubt very much whether we will repeat the bubble era of massive annual price gains any time soon. Hopefully never. This is because we will have to reverse the Fed policies that made money so cheap, and the banks will have to be more adroit in their lending. We need to return to proper credit and risk management, if we do housing will return to life in w more sensible way. This implies some annual gain – in line with affordability – and therefore a more secure financial outlook.
This is all context dependent. There will remain large chunks of the country with post-bubble overhangs of empty housing. That is an inevitable consequence of our stupidity. So my cautious view on housing is one that needs to be fitted with the part of the country you are looking at. My feeling is that once the bubble has been cleared up – maybe in a years time – the worst hit places will see a short and rapid adjustment. After that real estate will grow at around the inflation rate.
What we don’t want is another bubble!
So what do we make of today’s news?
The evidence mostly supports a forecast of slow, patchy, growth. Nothing to be excited about and plenty to be concerned over. The risks are more abundant than the opportunities.
We will see, over the next two days, plenty more data about jobs. So maybe we can revise this outlook by Friday to a more upbeat one. The odds of that? Not high. But at least I tried.
