real estate

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Retail Sales Falter – Significant?

Today’s report on retail sales is one of those we all have to squint at in order to get a good understanding of its importance. On its face the news was not good: sales fell 0.2% in May. That was the first decline in eleven months and so it marks the end of a steady upward climb. To put that into perspective retail sales in May were 7.7% higher than a year ago. But a decline within a supposed recovery is never a strong sign, and coming, as it does, alongside a string of weak to poor news we would be excused for fearing the worst.

But this time I think we should err on the side of the optimists. Not that I have had a sudden conversion to starry eyed prognosticating: far from it, I remain steadfastly in my stagnationist mode. This set of numbers, though, is skewed by the results for auto sales which we all knew had taken quite a hit in the wake of supply side issues stemming from the Japanese disaster earlier this year. If we back out those weak auto sales the remainder managed to eke out a slight increase. This very weak positive for non-auto sales fits exactly with my forecast of an economy going nowhere fast. So, in a rare show of agreement with the Wall Street optimists, I agree we should look more at the non-auto performance than the total figure for sales.

I am not saying this, of course, simply because it fits my narrative. My point is that I see nothing on the horizon that is sufficient to provide a boost to the economy and thus lift it out of the meandering course it is currently running.

My basic analysis remains the same:

  1. Demand is too weak due to very poor wage increases and prolonged – debilitating – underemployment
  2. Fiscal policy is now shifting towards reducing growth in order to reduce debt and deficits at the Federal level; this is already the case at the lower levels of government
  3. We are about to shift to a more neutral monetary policy – QE2 ends this month and is not going to be replaced
  4. Inflation and deficit hawks have successfully prevented any discussion of further stimulus – even though today’s report on wholesale prices demonstrates clearly that those of us who decried the fears of an inflationary spiral have been completely vindicated; the recent burst of retail inflation is dying down already
  5. The US political malaise is now a major risk factor – anyone investing in America from abroad now has to add political risk to their worries; it is extraordinary that we have become a banana republic in terms of the quality our debate, and our ability to get things done [or, more to the point, not done]
  6. Our real estate binge is still hurting us and will continue to do so for a long while yet – astonishing facts: almost half of second homes are not worth what their owners paid for them; and about a fifth of all mortgages are under water; this alone will freeze spending for years to come, and drag home prices down even more
  7. Corporations show absolutely no sign of constructive expansion – by which I mean they are still pumping up profits by squeezing existing workers rather than hiring more; this perpetuates the doldrums and dampens future demand
  8. Worse, big businesses are pouring money into labor saving capital machinery in order to avoid hiring new workers; why? the marginal cost of workers is very high even in a low wage period because of health care costs – and yet health care reform remains controversial
  9. Our banks are still unstable and propped up by taxpayer guarantees – they are only slowly boosting credit availability, especially at the small business end, and are hopelessly behind in working out their own real estate blunders; our banks are just poorly run
  10. There are a variety of international risks that could harm US ability to boost GDP via exports, even with a decline in the dollar – ironically this overseas risk is boosting demand for US debt just as we are trying to reduce its supply; we should be taking full advantage of low rates to borrow longer and more
  11. US military spending is untenable and will need to be cut – since we have constructed a large part of our economy around aggressive militarism this will hurt employment

Of all these things I think the one that stands out is the political gridlock that bedevils us. Never, since I arrived here in the the late 1970’s, have I seen America so lacking in energy, new ideas, or positive attitude. The entire place has fallen into a grim self-inflicted funk. Three decades of unbalanced growth, during which a very few prospered and the rest clung on for dear life by piling up debt, has produced a sullen and deeply distrusting divided electorate. Our leadership is, flatly, a joke. We are riven through with bureaucracy in both the public and private sectors. Our politics is insanely extreme and distorted by the anger vented by voters. We are actively reducing our middle class by attacking its economic underpinnings and undermining its sense of safety by openly discussing getting rid of our safety net programs. In other words we are increasing the risk of being a middle class American, without increasing the reward. So, of course, demand drops and falters. Of course people feel uncertain. Of course they have little or no tolerance for politicians who are too timid to provide strong leadership. And of course they latch onto whatever looney fool offers up what appears to be a quick fix.

We are being led into stagnation. Deliberately and assuredly. Why, I have no idea. The country deserves so much better.

Then again does it?

It elected these fools.

Addendum:

As a coda to the above:

I wish I could detect some hope for better policy coming from our electoral process. But I cannot. Last night’s kick off for the Republicans produced nothing of note other than the observation that they all remain committed to the same set of ideas that produced this malaise. Indeed they all appear more likely to double down on those ideas and thus to make matters much, much, worse. Not one of them had anything new, fresh, or interesting to say. They are all market magic people. None spoke about the economy in any way that justifies optimism. Eventually one of these clowns will be the Republican candidate – assuming no one else enters the fray – and thus will have the opportunity to attack Obama for his limp, lame, and altogether timid approach to solving our woes. That confrontation is shaping up to be a demonstration of weakness. It looks as if it will be a debate between business school and law school bureaucrats – people who excelled in class, but who freeze when faced with the need for dramatic action. You cannot use business or law school ideas to run an economy. You cannot simply fire people to improve earnings. Being a CEO is easy. Running the economy is not. People tend to get a little peeved when they are unemployed – University of Chicago nutty ideas notwithstanding. As a CEO you don’t care about that. As President you do. Or at least you ought to. This election will expose America’s intellectual decline and its monocultural focus. We have no plan “B”. I fear a clash of dueling Power Point presentations and calls for more consultative studies. We don’t need better management, we need leadership. We need new ideas.

A titanic struggle this will not be.

Oh. And by the way: if you want a giggle, read Larry Summer’s article in the FT earlier this week. He seems to be advocating further stimulus. He’s the dolt who advised Obama to go with half measure back in 2009. Why, in view of his policy advisory failure, do we keep recycling this ego crazed person? Is there no one else?

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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.

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The Long Slowdown Continues

One of the things I find most odd about our economy, perhaps dispiriting is the better word, is that no matter how hard I try, I find it difficult to become truly upbeat about it. We appear stuck in some gigantic rut the boundaries of which prevent us from breaking free and getting back anywhere close to a strong sustainable, and some cases even noticeable, recovery.

Indeed for all intents and purposes the recovery is looking more like a statistical quirk rather than a true increase in across the board activity.

This morning’s news that durable goods orders dropped 3.6% in April is hardly the stuff of great growth. It is, rather, yet another sign that whatever team we had is fast dissipating. I realize that a large part of the decline was in aircraft and autos, both very volatile areas, but the residual decline was still 1.5% a very poor performance for an economy supposedly growing. This makes the third decline in the past four months, and as I have said before, at some point we have to stop defending these declines as being oddities and simply admit that things are not very good.

Couple this with the fact that home prices, according to the Federal Housing Finance Agency, dropped a further 2.5% in the first quarter, and its hard to generate much enthusiasm at all for where we are.

Profits are good. That’s about it.

Does anyone care?

Not that I can see. The economy is still way underperforming. We have excess capacity sitting around unused. Corporations have mountains of cash idle and are chronically underinvested. In the interest of a perceived and false need for austerity most of our states are cutting into the muscle we rely upon to produce future wealth – education is being slammed even though politicians the country over bemoan our lack of skills to compete. And our totally dysfunctional political system replaces policy debate with outright lies and contradiction.

This political gridlock is compounded by the monoculture that pervades the country. Everyone in power, whether in politics, business, banking, or the support areas like academia, have all fallen under the spell of market magic economics and its associated finance, law, and accounting expressions. The problem with monoculture is that it leaves us few degrees of freedom in our decision making. By being so clustered around the same set of ideas our elites have squeezed out any real debate about alternatives. The thrall of those ideas is debilitating. The elites benefitted from them by way of excessive profit, outlandish incomes, a complete breakdown in ethical conduct, and an ability to establish rent seeking opportunities at our expense, but the game is slowly ending. Their self-referencing system became enormously efficient in hoarding and allocating wealth within the elite. But like all systems when it becomes too efficient, it lost its ability to adapt. It has one response to all problems: more market magic. This doesn’t work too well when it is market magic that is the source of the problem.

Deregulation opened up opportunities for profit. The bias in wealth creation was to move it upwards. The last three decades have been a spectacular success for the social engineering envisaged by right wing ideologues and their economist enablers. But the well has run dry. Now there is little left to re-direct upwards. To keep up the same pace of wealth accumulation at the top, the elite now has to undermine the last bastions of the middle class – Social Security and Medicare.

They may find this difficult to do. Yesterday’s special election in western New York produced a warning: a reliably Republican seat fell to a Democrat whose message was centered around an attack on the Ryan plan. Perhaps this was a sign that even our supine middle class can be shaken into resistance. We will have to wait and see.

Meanwhile the language and policies of the elite rely on worn out ideas spawned decades ago and brought to life in the think tanks and business schools of the 1970’s and 1980’s. Those ideas pre-dated the internet. They conditioned the thinking of millions of managers now at the helm of business. They became the core language of both political parties. They framed our regulatory and legal discussions.

And they undermined our economy.

We lost our way because we lost our balance.

We applauded greed and self, and used that to justify the defunding of community. Things like the notorious anti-property tax Proposition 13 in California stand out now as monuments to a false doctrine and an abandonment of standards. Likewise the long standing and successful effort to deregulate banking, which merely created opportunities for a few people to amass wealth at our expense and to create the illusion of a healthy economy despite the onset of rot at its center.

When such an elite is so committed to itself, and is so resistant to new ideas, it will lead a nation into the wilderness. Our long stagnation is testimony to that. Looking back over the past decade we can rightfully argue that our current slowdown began years ago. The entire Bush era produced little true energy or lasting economic growth. Profits boomed. Wages stagnated. Real estate sucked in wealth to the detriment of productive capacity. Standards were lowered. Discourse undermined. Ordinary families struggled while a few, a very few, wallowed in golden age style luxury. The whole thing blew up in an orgy of misdirected greed and ignorant investing.

And now they want to persuade us that we cannot afford what’s left of the middle class lifestyle. Or that this recovery amounts to more than we all feel it is.

The only reason we are having a debate about debt, inflation, or the deficit is because those things matter to the wealthy. They’re the ones who would suffer most were our current budgetary problems to persist. The banks stand to lose. As do creditors generally. So austerity protects them by shifting their potential loss onto those who can least bear the burden. This is so short sighted it is almost beyond belief. But it doesn’t surprise me. The long slowdown is their creation. It is the logical outcome of decades of economic mismanagement and the application of false economic doctrine. They now need to save themselves. Which is why the media latches on the even the most stupid of plans when presented as a savior. And it is also why the media finds it hard to act as a neutral critic: it too has lowered its standard, and is populated by people educated or raised within the bubble of the market magic belief system.

Maybe they will all succeed in plastering over the cracks and arguing that this stagnation is the best we can achieve. maybe they are content with the story that we have to settle for less and that our great entitlement programs are no longer affordable.

When you hear this line of reasoning ask yourself how we arrived here. Who led us here? What were there ideas? Who benefitted along the way?

Above all else we need to wonder out loud why it is that the American economy, deep as it is in natural resources, talent, and and tireless workers needs to abandon its poor, its elderly, its sick, and its young. Why is that?

My guess is incompetent leadership. Rotten lessons taught by misguided professors to decades worth of students who are now faithfully leading us astray as they implement outmoded ideas and false economics.

They may defend their profits. They may still have all those bank branches. Those legal and accounting fees will provide for several homes for each partner. They will still enjoy those very important summit meetings where those who know rub shoulders with those who do stuff. They will still donate some of their wealth to great charities to spread the wealth a little.

But will they have paying customers?

Will the demand be there?

Do they care?

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New Home Sales Rise; So What?

Sorry. I just can’t get too excited over today’s news that sales of new homes rose 7.3% in April. So what? But I pass the news on despite myself. Sales are now running at an annual rate of 323,000, which is much better than March’s 301,000, but is way below – to the tune of 23.1% down – last year’s number. It is far too early to call this the first signs of a turn about in real estate. The unsold inventory of new homes is at an all time low of 175,000. That is not because new homes are flying off the shelves, but because construction has slowed to a crawl. At the current pace of sales clearing that inventory would take between 6 and 7 months, which is not far off normal. Then again quite what normal is in these post-crissi days is yet to be discovered.

Besides, new homes sales are dwarfed by the activity in the existing homes arena. There the unsold inventory is huge, at around 3,900,000. This is just the listed unsold inventory. According to reports from realtors and the banks there are another 2,500,000 foreclosed homes sitting in bank portfolios waiting to be sold as well. This massive inventory overhang in the existing home market is distorting everything at the moment and will shape the real estate recovery, such as it is, over the next year or two.

The size of the foreclosed portfolio alone casts a very long shadow over home prices. Banks have been unable to keep up with their own foreclosure activities. They have created a huge backlog for themselves which could cause their losses to escalate as they begin to clear it out. The steady trickle of foreclosed homes has had a depressing effect on home prices already, were the banks to pick up the speed at which they liquidate their inventory, they would destabilize prices even more.

Considering that the median price of an existing home has now fallen to $163,700, while the comparable price for a new home is $217,900, the bank portfolio effect will leak from the existing home market into the new home market as well.

So, even with today’s announcement of apparent improvement, I see no reason to get excited over real estate any time soon. On the contrary: that inventory overhang makes me think that prices have another round of declines ahead of them. Things could get worse before a true recovery sets in.

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Choppy Waters?

The Conference Board loves the publicity it gets whenever it releases its Index of Leading Indicators. Today it entered the ranks of those trying to manage expectations downwards. It told us that the drop of 0.3% in the index during April portends choppy waters ahead. This was the first time the index had declined in almost a year. So, I agree. Something is not quite right. But then again we all knew this didn’t we?

One of the main components of the index is claims for unemployment assistance. They went in the wrong direction in the last few weeks before improving last week, and then again today – more on that in a moment. I have been arguing for a long time that the recovery is nowhere near the scope or size we need to bring the labor market back to satisfactory levels. In my opinion there has been a major policy failure in this regard. The emphasis was twofold: first to prevent disaster; second to nudge the economy back towards health. Both at the time, and in retrospect, this seems to have been a weak response. It has left us with a legacy of stuttering growth and a very elongated recovery time. Yes, history tells us to expect weak and awkward recoveries in the wake of a bank created crisis, but that should have led policy makers to be bold, not tepid. Meanwhile unemployment as expressed in all the associated measures of the labor market will continue to create a drag on activity. Today’s leading indicators report simply captures that drag in vivid detail.

Adding to the gloom this morning was the news that the Philadelphia Fed’s measure of industrial activity also slipped back. This index is designed to measure the extent of growth and any reading over zero is positive. The higher the number the better the news. In March this year the index stood at 43.4, the best reading since 1984. It has now sunk to 3.9. Clearly things have slowed down. There is still growth, but the margin for error from a policy perspective is very narrow.

While we are piling on the weak news we also heard today that sales of existing homes sank back again. They slipped to an annual rate of 5.05 million in April, which is a drop of 0.8%. While that decline is not enormous and could be explained by any number of weather related excuses, the fact that sales failed to increase is a sure sign that real estate is still mired in the doldrums. To make matters worse, home prices show no sign of stemming their slide: they are down about 5% since this time last year. At one point prices firmed slightly last year, but they have since resumed their decline. In the absence of a stronger general recovery, higher wages, and a healthier jobs market, I see no reason to assume that prices will not continue down.

Now for the good news. Back to those new claims for unemployment assistance. Today’s report showed a decline in claims to 409,000. This a much better improvement than most people expected, especially in view of the upward revision to last week’s total to 438,000. It has been very difficult to spot a trend in this data in recent weeks, claims had reached a low of 375,000 in February, but had shot back up to 478,000 in April. If ever there was choppiness, to use the Conference Board’s description, the claims data embodies it. The key point to make about the employment situation as that there is no rapid improvement developing. Nor is there any sign of help arriving. On the contrary, with Washington focused on all the wrong issues, and distracted by the spectacle of competing debt reduction plans, I cannot see a reason to be upbeat about the jobs market at all. No one cares. Perhaps they are all embarrassed by their failure to deal with it in 2009 and 2010. I would like to think so. But I have my doubts.

One last thing: if you ever want to disabuse yourself of the sensibility of the stock market, consider today’s reaction. Stock prices rose. Why? Because the market embraced the improvement in claims as being the relevant news of the day. All the rest? Too gloomy, and therefore ignored. No wonder stocks move all over the lot. It makes more sense to argue for higher stock prices on the basis of profits. Corporations are doing well. Cash flows to shareholders are strong. They ought to be: wages are lousy, and hiring weak, so all benefits of what growth there is flows asymmetrically to capital.

Yet the stock market reacted to better jobs news. Clearly the traders know that if all the gains go to capital, eventually their gravy train runs out of steam. Somewhere along the way workers need to get a piece of the action too. Without growth in worker incomes there is no growth in sales. It’s all about aggregate demand. So maybe our traders are all closet Keynesians. Maybe not. But at least they acknowledge something the politicians don’t seem to understand. Without demand this recovery will go nowhere.

And that’s where it seems headed.

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