This Is Not Good

What’s that old saying? The rich get richer and the poor get poorer. Today’s blizzard of news brings that saying to the fore. I no longer think our political class is simply inept. It is supremely cynical as well. It has vectored into a discussion of issues that it alone is concerned with. At the same time it has brushed aside issues that the average household is vitally engaged with. In crude terms, I don’t think anyone in Washington gives true thought to our unemployed. The attitude appears to be that they gave it a try, albeit half hearted, and now they can no longer be bothered by it.

Why am I in this mood?

Today’s news is just not good.

The ADP jobs report shows that the private sector added a paltry 38,000 jobs in May. That’s not bad. That’s awful. Consider this: most analysts were expecting a number around 175,000. No wonder the stock market dropped like a stone today. May’s figure was rotten. It was more the kind of outcome we expect in a very poor economy, not one supposedly growing.

Then there was the report on manufacturing which seems to be in retreat as well. The Institute for Supply Management’s monthly index dropped sharply from April’s 60.4% to 53.5% in May. Any reading over 50% means that the sector is growing, but a drop of that magnitude right in the middle of an expansion is not a good sign at all. Manufacturing performed relatively well over the last two years as businesses rebuilt inventories and the global economy grew back from the low levels of the crisis. But with the effect of both those two now tapering off, there is too little strength in the basic economy to sustain much expansion. So manufacturing is falling back to a much lower level of activity – one more in keeping with a stagnant economy.

The car makers too hit a wall. Ford and GM’s sales were nearly flat in May, and all three of the big Japanese makers saw declines. Only Chrysler had a gain – about 10% – largely due to strong Jeep sales.

Adding to our misery, yesterday we heard that home prices are continuing to fall. The Case-Shiller index registered a 4.2% decline in the first quarter this year. While some headlines breathlessly announced this as signs of a “double dip recession” in housing. I disagree. There is no double dip because the decline has been inexorable and predictable. Yes, there was a short respite last year when the government’s tax credit for first time buyers bolstered demand, but that was always going to be a temporary blip in an otherwise continuous decline. So real estate is in the midst of a depression that shows no sign of ending. The price decline is simply confirming this. The extraordinary boom in prices that took off around 1998 has now imploded. We are back at about 2002 prices and headed south. Anyone who bought a house in the last nine years is most likely looking at a loss of some sort. Of course Case-Shiller’s headline number is a national index and there are local pockets moving in the other direction. But those pockets are few and far between. The US real estate bubble of recent years is one of epic proportions and will go down in history as a supreme example of irrational behavior.

Shiller called it exuberance in his analysis years ago. I think it is stupidity. The truly sad part is that regular people were bewitched by the supposed never ending gains available in home prices – how many times did we hear how smart people thought themselves to be, when in fact they were being dumb? And now the reckoning is appalling. Home owners are having to confront not just paper losses, but cash losses as well. And those losses are continuing to mount. As each month presses prices down more households learn that their home is worth less than they paid for it. This erodes confidence and locks people into homes they would prefer to sell. Slowly this accumulates into a block on overall activity. Think of it as a form of economic sclerosis. Until those losses are taken, however painful that may be, and people free to begin afresh we will find the economy weighed down by our unfortunate and ill advised obsession with real estate.

Combine this downcast psychology with our plainly inept banking system that is totally unprepared for dealing with the level of foreclosures it generated through its incompetent – and unethical – lending, and we paint a picture of a nation dogged by its own hubris and massive miscalculation. No wonder people are risk averse right now. They regard the stock market as gambling. And their fabled faith in home prices too has been exposed as a charade. With interest rates near zero the average person has nowhere to turn to generate a decent return.

Thus ends the years of illusion. With private debt piled up, and years of illusory gains to be unwound at the same time, households have precious little room for maneuver.

Getting a population of consumers thus battered to spring back into action is a fool’s game.

Especially when we add in the burden of oil and food prices. There is ample evidence that these combined effects are the reason the economy seems to be slipping into a period of stagnation.

Meanwhile American Express reports that its largely affluent customer base is alive and well. They are back spending at high enough levels to lift Amex’s earnings by a goodly percentage. So the top echelon of society is back in ruddy health. As for the rest? Who cares?

Not Washington, that’s for sure.

In view of all this, and in view of the dismal wreck that is our political process – never in my memory has a western political system been exposed as so bankrupt, corrupt, and in need of repair – I just don’t see how we can expect much strength in the economy. Nothing being debated in Washington is remotely stimulative. Indeed it is mostlyjust the opposite.

As I said: we appear stuck. The rich are getting richer. The rest are abandoned and trying to survive. And this is supposed to be a recovery.

This is not good. Not good at all.