Jobs and Housing: Slight Improvement

The news over the last two days has been somewhat brighter. Both housing and unemployment showed signs of moving in the right direction. The key, of course, is whether this continues, but as of the moment we can be a little more optimistic. Naturally, economics being what it is, there are still clouds hanging around, but for today let’s ignore them.

First, jobs.

The weekly release of data concerning new claims for unemployment assistance was encouraging. There were 21,000 fewer new claims last week. This brings the total down to 434,000 which is the lowest since the beginning of July, and well down from the summer peak of 504,000. The problem is that there are the usual seasonal adjustment caveats that could undermine this improvement. That adds a tone of caution. But the drop is large enough for us to consider it real. Another issue of interpretation is why claims fell. Is it because people are finding it slightly easier to get a job? Or is it because they are no longer looking? The answer, unfortunately, is somewhere between the two. So the only way we can be assured that this is good news is to see it repeated several times.

The target we all need to keep in mind is a new claims tally of around 350,000 to 375,000 a week. Once we reach those kinds of levels we will be certain that the economy is on the right track.

Second: housing.

Sales of both new and existing homes shoed a little strength in the recent numbers. New home sales rose 6.6% in September, and sales of existing homes jumped 10.0%. This suggests that the housing market finally bumped along the bottom sometime this summer and is now beginning a recovery of sorts. While this is good news, we should keep a clear head: neither statistic is very strong compared with the halcyon days of the bubble era. And even compared with last year – hardly a great time in real estate – new sales are running 21.5% behind. The best way to consider this week’s news is to feel relief that the bad days are drawing to a close. The market is recovering. It will never be quite the same again, or at least we all hope not, but the rot has ended. That isn’t saying too much given how far we have fallen, but it means a great deal in terms of the economy overall. We can manage with a much smaller real estate sector, in fact it would be very healthy for all of us if less of our national wealth was tied up in unproductive real estate. The essential fact is that the uncertainty created by what seemed like an endless collapse is over. That implies consumers can start to plan more reliably, which, in turn, means they can start to spend on other things and not have to worry about further erosion of wealth.

It is this last point that drives the larger picture.

As long as households are faced with highly volatile house prices, or job prospects, their natural inclination is to hunker down and save money. Paying down debt takes priority over taking on new debt or spending. Once the perception of decline ends, even if the economy is still at a low ebb, people can make more certain plans and start to spend. That’s when we arrive at the inflection point after which the economy chugs back to life.

Our problem in this cycle has been the enormity of debt that needed to be paid down before households had retrenched sufficiently to feel comfortable and able to sustain themselves. That debt pay down is still going on, and seems likely to be the dominant trend for a few more quarters. If that is so, we will not get a robust recovery going until sectors like housing have demonstrably bottomed out. People have to feel secure. Perhaps we are arriving at that point.

Or not.

The entire furor over foreclosures is a potential disruptive force that could push home prices back onto a downward slide. There is no doubt that the banks have created a foreclosure mess. They deserve to lose more money as a result. The problem we all have is that the longer the mess is drawn out the longer it takes to get the real estate market cleaned up. The lingering overhang of unsold homes due to foreclosure is the one last headache left from the great bubble. Inventories of unsold homes are falling, but that inventory is a murky number. To the extent that it excludes foreclosed homes we have an accurate idea of how the inventory to sale ratio could play out over the next few months. If the inventory excludes a large number of homes because they are embroiled in foreclosure arguments and law suits, then we have an inaccurate picture, and thus have less of an idea about whether we have actually hit bottom.

In that vein this week’s news that the Case-Shiller index dropped 1.0% is a warning: there could be another round of price decreases as the foreclosed homes work their way through the system.

Nonetheless: we appear to be getting improved performances in two of our most weak areas. That should help prevent further decline in GDP.

Speaking of which: tomorrow we see a first look at the third quarter. The lower that number, the more likely the Fed acts next week. Right now the expectation is for GDP or around 2.0%. That’s not enough by far. Anything less should set off the alarms.