More Mediocre News
Ho hum. That seems to be the order of the day with respect to economic news this week. Nothing special. Sometime around last December the head of steam we appeared to have gathered over last fall dissipated, and we are left with a kind of patchy sideways feel. The general trend is still upwards, but all pretense to a strong recovery has long ago evaporated. Get used to it: this could be a long summer.
The news today fits right in this narrative.
Durable goods orders rose nicely, by 0.5% in February, but that included a strong performance in machinery and aircraft. Other kinds of products, such as autos, defense, and electronics fell. The good news is that this is the third straight month of increase, and that machinery orders increase is a positive sign that factories are retooling or expanding, which implies an expected increase in activity somewhere down the line.
The bad news is that anecdotal evidence suggests that the uptick in orders reflects export growth and inventory re-adjustment and not some surge in domestic spending. It is wrong to say that the domestic economy is still dormant or declining, but it is equally wrong to argue that the clouds have definitely lifted.
They have not.
Still, orders are up over 11% since this point last year, so there is life in at least this part of the economy.
We cannot say that for housing.
Yesterday we heard that sales of existing homes declined in February, so it cannot be a surprise that today we were told that sales of new homes also dropped – by 2.2%. This brought the annual rate of sales down to 318,000, which is the lowest ever recorded and is 13% off of last year’s run rate.
There is no way to put this other than to say, simply, that is is awful.
Real estate is in such a funk that we cannot expect it to p;lay a significant role in near or even medium term growth. Prices remain weak; sales are flat or down; foreclosures pile up; home equity figures are rotten; and construction is imploding. Nothing on that list is remotely positive.
But at least we are absorbing the lost activity. Most of the lost jobs in construction are behind us – we lost over 1.5 million in this down cycle, which is a huge part of the total number of lost jobs. Most of the lost value is also behind us, but the future is bleak for any value accretion, so the recovery will not float many of those negative equity homes back into the black. This means there will be a steady trickle of foreclosures, debt write-offs, and other adjustments for months and years to come. This long tail of re-balancing will act as a drag the economy, much like an anchor. The lost value and outright lost equity will combine to dampen spending for years. As consumers adjust their habits and save in other ways rather than through real estate price inflation, that shift towards thrift will accentuate the drag. While thriftiness is usually not a bad thing, at present it is as close to being terrible as it is possible to be.
This negative impact of thrift is a classic example of market failure. It destroys the argument that markets are capable of self-adjustment, at least within socially acceptable limits. Hopefully none us us will fall prey to the, now debunked, notion that a deregulated economy is better at allocating resources than a regulated one.
But that’s another story.
Right now we are being subjected to a steady trickle of truly mediocre news.
I suppose that’s a better situation than the one we were in a few quarters back, but it makes the road ahead look both long and tedious.
