Consumers Yawn, Home Price Confusion: Nothing New
Get used to these dog days of summer. We may be set for years like this.
The fact that consumer sentiment rose slightly according to the Conference Board survey for August means very little to anyone with an eye on the underlying economy. Only superficial analysts, like those infesting Wall Street, could be cheered by a consumer confidence reading of 53.5. That’s weak this far into a recovery, and masks some fairly startling numbers at the more detailed level. For instance: the business conditions outlook survey registered a slight decline in optimism. That’s probably not a surprise, we seem to be bumping around nowadays with the word slight defining most movements. No. The really interesting number is not the decline, but the absolute level. Only 8.7% of those surveyed said that business conditions are “good”. That’s awful. And it shows the depth of the drop in attitudes across the economy. People truly are mired in a swamp of negative and fear ridden feelings that totally obliterate anything optimistic. We are a surly and angry bunch hunkered down and expecting the worst. No wonder the economy is sluggish.
Even when there is supposedly good news it can be picked apart to reveal a more depressing truth. Today’s Case-Shiller report on home prices gave another lift to the short term minded folks on Wall Street – they latch onto any news and over react with gusto. Home prices edged up for the third straight month, with 17 of the 20 major markets measured by Case-Shiller showing increases. The overall increase for the nation as a whole was only 1.0% at an annual rate, so this is nothing to get excited over, but it is being written about as marking the end of the great decline. Stability is the new watchword. I am not so sure. A closer look at the numbers shows that the biggest boost came in areas where the Federal tax credit for first time home owners had the biggest impact. PLus those three straight months of price rises coincide exactly with the peak of activity generated by the tax credit. That makes me wonder what will happen when the effects of the tax credit are eliminated. As in the August figures we will see next month. It will not be a shock were prices to fall once more. Perhaps not by a lot, but the post-bubble trend may well assert itself once again. That means the tendency will be for home prices to continue to languish and decline, rather than show a steady increase.
The juxtaposition of the consumer confidence numbers with the home price data makes for a telling narrative. The economy is becoming becalmed in a Sargasso like sea of self-imposed constraints from which it will be incredibly difficult to break free. The deeply defensive attitude of households and business is steadily being translated into an economic reality that brings to reality the exact imagined mess that we should be trying to avoid. We are trapped in a period of mediocrity and low growth because that’s what we are expecting to deal with. We have created the very conditions that our actions are designed to avoid.
Such is the nature of economic activity. What comes into being is that we imagined. Failure of imagination begets the current bleakness. We have only ourselves to blame. This economy is our doing, and I suspect that the consumer confidence and home price data is a very accurate reflection of the limitations we now have imposed on ourselves.
Households are retrenching quickly in order to pay down debt and bolster themselves against the perceived loss of wealth form the fall in home prices and the uncertain employment outlook. Yet, in truth, that wealth from home price inflation was always an illusion, and the chances of losing a job are still small for those currently employed. So illusion abounds, fear is overblown, and thus we are reduced to inertia instead of healthy activity.
Nothing good can come from the persistence of this negative outlook. Until attitudes change to a more ebullient trajectory we should expect to see sideways moving data, and an economy unable to move into a high enough gear to create wealth and jobs at a healthy rate. At the same time enough recovery has occurred that we are unlikely to subside further: neither the consumer sentiment data, nor the home price data suggested an imminent decline.
The economy is in a coma. Not dead, and not alive. It just is.
And that’s the problem: “just is” can last a very long time. Ask the Japanese.
