Peter Radford / Economics / durable goods orders, education, health care, jobs, real estate, unemployment /

A Mixed Bag

February 24, 2011

The economic news this week has been a mixed bag. There is no news in the report that the National Association of Realtors is going to adjust its data – they have been giving us what appear to be wildly optimistic reports throughout the crisis. Neither should we be surprised about the slide in durable goods orders. Typically those orders lead the recovery and tend to taper off a bit once the economy is out of recession. But enough of that, here are the bits and pieces so far:

Housing

According to the Case-Shiller index home prices dipped slightly in December. The drop, 1.0%, was slight but significant because it tells us that there is no sign of a resurgence in housing. The more amusing news is that Karl Case and Robert Shiller interpret the news in different ways. Case is less pessimistic and suggests there is a “chance” we are at the bottom of prices. Shiller, however, is now talking of the “substantial possibility” that prices could drop another 15% or so. So which is it? Are we at the bottom? Or will prices drop some more? Who knows? Certainly not economists trained in the orthodox school. They are the ones who argue we cannot tell whether there is a bubble to begin with. I remain unconvinced that real estate has reached a true bottom.
Take, for instance, the low level of new home sales, which fell 12.6% in January and thus wiped out almost all the 15.7% gain in December. Most of us thought the December number was inflated by a last minute rush by buyers to take advantage of various tax breaks that expired at the end of the year. But the size of the drop in January is still quite disturbing. And how do we make sense of the last two months in the West where sales rocketed 62.5% in December only to collapse 36.5% in January? Yes there was a California tax break, but what is the trend? Is there a trend? Meanwhile January sales were up 54.5% in the Northeast, where the weather is often used to explain away odd winter dips in data, but surely cannot explain such a surge. Further: the inventory of unsold new homes is now down to 188,000 its lowest level since 1967. That hardly speaks to an optimistic view on the part of home builders.
In contrast, the sales of existing homes has edged up steadily in five of the last six months. Unfortunately it is this data series that is most untrustworthy since it is produced by the realtors themselves who, obviously, have an incentive to goose the numbers. This week’s report was accompanied by an explanation that sounds too good to be true: job growth, improving economic news, higher stock prices, and rising rents – everything but the kitchen sink – were given as reasons January’s 2.7% increase in sales. All of which may be true, but we should also note that prices dropped as well, by 3.7% to their lowest since 2002. Perhaps sales are up because prices are still weak?

Durable Goods:

Orders finally showed some life in January after being relatively weak the previous three months. Unfortunately the growth was almost entirely due to the sales of aircraft which is a wildly erratic sector because of the inherent ‘chunkiness’ of its order book. Take away the 27.6% increase in aircraft sales and the overall increase of 2.7% in January turns into a 3.6% drop. The year on year numbers are still quite strong: we are about 9.0% up in the last twelve months, but there are now signs that the initial post recession surge in capital goods sales is now giving way to a less robust trend. All of which is entirely normal, but which suggests that the economy has not much room for more above trend growth. By which I mean that the recovery, which looks as if it is producing GDP growth above the 3.0% trend line at the moment, is more likely to settle back than accelerate further. Again, this is normal, but we needed a much longer period of above trend growth to get unemployment down quickly. The durable goods data does not support the view of strong GDP growth continuing much beyond 2011.

Jobs

Today’s weekly report on new claims for unemployment assistance, tell us very little. Claims dropped to 391,000, which is 22,000 down from last week, but may still be unreliable because of weather and holiday reporting problems. That we are below 400,000 is a good sign. That we remain a way off the 350,00o upper boundary threshold used, as a rule of thumb, to designate a healthy job market is disappointing this far into a recovery. The numbers of people getting some form of unemployment benefit fell by over 89,000 last week, but this is an ambiguous figure. It might mean improvement as people no longer need aid. It might equally mean that people have simply exhausted their aid and are now exposed to the harsh realities of survival without it. My guess is that both factors are at play. The economy is adding a very low 83,000 jobs a month at the moment, which is way short of the numbers needed just to stay even with workforce growth. There is no need to keep repeating: our job generation record is just awful at the moment. There are signs of life and by mid-year things should be better, but I doubt we will reach the levels of growth needed to get us back to normal levels of unemployment any time soon.

One Last Thing:

I attended a Foreign Policy Association dinner last night and heard comments from a variety of what appear to be well entrenched establishment folks. All well meaning no doubt. The most interesting came from a leading figure from Singapore. He runs a huge sovereign investment fund and so pays a great deal of attention to the US economy, both short and long term. He saw good GDP growth this year and then some risks on the horizon. Amongst them he identified the risk of the US becoming less open. By which he meant less amenable to immigration which he sees as a demographic strength of the US and as a source of talent to drive the economy forward. He also expressed concern over our decaying infrastructure and the cost needed to catch up with worldwide standards of investment. Such a catch up will require funds to be diverted from other uses, one of which, health care, he also identified as a long term risk to growth. Lastly he also warned us about the state of our education system which is becoming enormously bifurcated. The best of our system is world class. The rest is well below average. Since it is the average education that forms the basis of the economy by providing the necessary talents in the workforce for us to compete, he sees our system as a net liability and not an asset.

This is an interesting point and slips over into the debate over health care as well. Americans are justifiably proud of their world class institutions, and their performance, in both academia and health care. They always refer to the outstanding results in those places as somehow justifying the entire system. But it doesn’t. The most important results are those the average American experiences. That is where the bulk of the population lives, and that is where the country falls short. Increasingly so. It is all well and good that a rich person can get world class health care and ensure a great education for their family. But if the rest of the nation cannot match that ability, the system is not doing its job. When judged by the average, and not simply the best, America is losing ground in both health care and education despite outspending everyone else by large amounts. In other words we waste a lot of money on an underperforming system. Fixing that is, of course, not easy. And it will be wrenching because it requires us to confront the failure of what we do now. The hard part is getting that failure articulated such that Americans can accept it. Unfortunately the only acceptance so far seems to be relentless attacks on our teachers, whom, by and large, are underpaid. I have heard very clever people argue we can solve the problem in education by firing the “bad” teachers, without offering an explanation as to how we identify such teachers, and how we replace them with better and presumably more motivated ones. I fear that all the current bad mouthing will simply drive out the good teachers who are tired of carrying the burden of the systemic failure, while leave us with the less able – those who have no alternative but to teach. We will certainly drive out the good once we start cutting benefits, pensions, and salaries.

Perhaps we all ought to rethink what we are doing before we add to the system’s problems by making it difficult to attract the talent we need to teach our children.