Dreary As She Goes
Today’s news matches the weather: dreary, below average, and dispiriting. This is supposed to be spring. It feels very far from that.
I suppose there is no real news in the report that housing starts gave up what meager ground they had gained in March. April’s drop of 10.6% to an annual rate of 523,000 is simply bad. Most analysts were hoping for a continued bump up, with 575,000 being the most commonly quoted expectation. So much for that. If we look at the three month moving average to eliminate the monthly quirks in the data we find that starts are stuck around 542,000. That’s about half what they were during the more normal and healthier years back in days gone by.
This rather depressing level of activity in housing should be a surprise to no one who pays attention to the longer term, or, dare I say it, to history. Crises precipitated by bank stupidity, as our latest disaster was, are always – always – followed by very long slow recoveries. So long, and so slow, that to many people they don’t feel like a recovery at all.
Couple that historic viewpoint with the more contemporary redistribution upwards of national income, so that the rich receive a larger share of the spoils, and it is no wonder at all that the engine driving us forward sputters and belches fumes rather than hums along. This is not me being unduly pessimistic. It is simply what I read into the data through a historically informed lens. Wall Street and our memory challenged media has far too a superficial view. They are looking for a more speedy recovery. They won’t get it. Not that they understand the impact of income inequality. They are the ones who benefitted, so in their part of the world all is well. Thus they have difficulty internalizing the consequences of the much worse conditions that the rest of the counrty is still wallowing in.
I think it is this bifurcation in experience that is driving the inability of our elites to comprehend what to do. They feel good once more. They question the effort of the rest. They feel frustrated that the general economy is not responding the way their localized economy has.
They have lost touch with the rest. But we knew that already didn’t we?
As in housing, today’s industrial production report was downbeat. Far from more growth, which is what the media was touting as recently as yesterday, production was flat. Worse yet, both the February and March numbers were revised downwards. Clearly things are not as rosy as we had been led to believe by the preliminary figures. Yes, production is up about 5% over the past twelve months, but that is not exactly a boom. And capacity utilization actually fell slightly in April, and now sits at 76.9%, which is way short of a level at which inflation could be expected to kick in.
Amongst the big reasons for this rather dismal report is the flow of auto parts from Japan. The recent disaster there is reducing the availability of parts for US producers and is thus slowing activity : auto production fell from an annual rate of 9 million units to 7.9 million units in April. As long as the Japanese supply bottleneck persist I expect production to bump up and down rather than develop along a consistent upward trend.
So, what do we make of this?
Obviously the economy is not in ruddy health. It is not contracting either. It is simply chugging along, and remains very prone to downside risks. I just cannot see housing building ahead of steam any time in the next year or two. The aftermath of the bubble has wreaked havoc with the backlog of unsold homes, rotten wage increases, and household retrenchment draining away demand or skewing supply. Prices are soft and will stay that way. Indeed the longer the market stays weak the more likely we will see another jolt down as the backlog of people wanting or needing to sell outstrips the recovery of demand. Add in the stupidity of the banks and their total volte face in credit standards – their perennial overreaction is a laughable indictment of any semblance of stability they may lay claim to – and the conditions in real estate remain extraordinarily weak.
As for production: the latest reversal breaks a string of gains and may signal the end of the first phase of recovery. That Japan effect, though, may be adding too much noise to the data, so we must wait and see whether April’s weakness continues. If it does, then I fear that we have reached a plateau of activity far below that we need to lift ourselves back onto a healthy growth path.
Numbers like these are hardly a terrific backdrop against which a debate over the long term deficit and debt issues can be conducted. Any attack on those issues will reduce growth by sucking out demand. Right now we have only a slight latitude for such a reduction. Not that the debate seems informed by facts. As I mentioned above, our elite is indifferent to inconvenient facts. Besides they’re all doing well. For them the recovery has been a good one.
They need to get out more.
