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The Economy May Not Be in
a Recession – but that Doesn’t Make it Healthy
In a recent speech, Federal Reserve Chairman Ben
Bernanke said the financial markets are “stabilizing” but remain
“far from normal.” That assessment might also apply generally
to the economy, which is hardly “normal,” if your definition of
normal includes even moderate growth and a housing market that
isn’t on life-support. Whether the economy is stabilizing
remains an open question, however, as economists continue to
debate whether we are heading into a recession, have already
stumbled into one, or still have some hope of avoiding a serious
downturn entirely.
“The data certainly reflect a weak
economy, but not one in recession,” Ken Goldstein, an economist
for the Conference Board, noted recently. He was responding to
the slight (0.1 percent) increase in the leading economic
indicators in April, equaling the March gain and providing
statistical support for those who say a recession is not
inevitable. The odds-makers are now rating the likelihood of a
downturn at 45 percent, down from 90 percent just a few weeks
ago. Even Alan Greenspan, the former Fed chairman, who had been
predicting the most severe downturn in decades, is now saying
what while we may actually be in a recession, “it’s an awfully
pale one.”
What the
statistics say or don’t say about the state of the economy is
probably less significant than how consumers feel about it, and
recent surveys suggest that the national mood is glum. The
Consumer Confidence Index declined in May for the fifth
consecutive month, leaving the current reading (57.2) at about
half what it was this time last year. A Washington Post-ABC
poll found that 7/10 Americans are worried about maintaining
their standard of living, echoing the results of another poll
that found the level of economic anxiety at its highest level
since 1981. The combined effects of minimal job growth, lagging
wages (which aren’t keeping pace with inflation) soaring gas
prices , and higher prices for food and just about everything
else, are clearly taking a toll – and not just on low- and
middle-income consumers. In the Spectrem Group’s most recent
survey of “affluent” consumers (with $500,000 or more in
investable assets), 64 percent of the respondents said they
planned to cut back on luxury purchases, 65 percent said they
plan to keep their car for longer than in the past, and 38
percent are cutting back on travel this year because of their
concerns about the economic outlook.
No Boost in Lending
The Fed’s interest rate cuts (seven since
September), its bail-out of Bear Sterns and the infusion of more
than $900 billion in the credit markets have eliminated the
sense of impending crisis that gripped the financial sector a
few weeks ago. But those efforts haven’t done as much as
policy-makers had hoped to boost lending. The Fed’s most recent
survey of loan officers reported that half the banks had
tightened their underwriting standards of commercial and
industrial loans, up from 30 percent in the January survey.
Financial institutions are also reporting stricter guidelines
for residential mortgages, which will come as no surprise to
anyone who has tried to purchase a home recently – or to to the
real estate agents and mortgage brokers working with them.
The housing
market’s woes, described almost daily in the media, show no
signs of abating, as home prices nationally continue their
unnerving and largely unprecedented decline. The Office of
Federal Housing Enterprise Oversight (OFHEO) reported that
prices declined 3.1 percent , year-over-year in the first
quarter, the steepest decline in the 17-years the agency has
been tracking these numbers. The 1.7 percent drop between the
fourth quarter of last year and the first quarter of 20078 was
the largest quarterly decline ever, according to the OFHEO.
The
Case-Shiller/Standard & Poors index, which tracks a broader
cross-section of homes, reported a 14.1 percent year-over-year
decline – the largest in its 20-year history, with 19/20
metropolitan areas reporting price reversals and six of them
reporting declines of more than 20 percent.
“There are
very few silver linings” in these numbers, David Blitzer,
chairman of the S&P Index Committee told reporters. Joel Naroff,
principal in Naroff Economic Advisors, similarly described the
data as “ugly. Everything is working in the direction of more
price declines,” he told the Wall
Street Journal.
Foreclosures Still Rising
Foreclosures are a large part of the problem.
RealtyTrac reported a record total of 243,353 foreclosure
filings in April, up 65 percent in the past year and
representing 1/519 households. Hope Now, the voluntary
program through which banks are trying to stem the foreclosure
tide, reported that participating institutions completed 183,000
work-outs in April – a record volume for the program, but not
enough to keep pace with foreclosures. According to RealtyTrac,
banks took possession of another 54,574 homes in April, up 145
percent compared with the same month last year. The company
predicts that banks will repossess an average of 60,000 homes
per month between now and the end of the year, by which time
they could own a total of 1 million homes, representing
one-fourth of the residential properties for sale.
As their REO
portfolios balloon, many lenders are beginning to cut prices
aggressively, and those efforts are stimulating sales in some
hard-hit markets. Las Vegas, Sacramento, and Fort Myers, FL,
which top the national foreclosure list, all reported increases
in sales of existing homes in April, in marked contrast to the
national sales trend, which remained firmly negative. The
National Association of Realtors (NAR) reported that existing
home sales “eased” in April – an interesting euphemism for an 18
percent year-over-year decline. But the rate of decline was
even steeper (22 percent to 25 percent) in the fourth quarter
last year, leading some analysts to suggest that the bottom of
the housing downturn may be near. The sales increases reported
in a few markets indicate that “sellers have moved into the
acceptance mode, according to housing economist Thomas Lawler,
who told the Wall Street Journal, “that’s the first good
news for the housing market in months.”
The new home
market seemed to provide some additional good news, in the form
of a 3.3 percent increase in new home sales in April compared
with March. But industry executives quickly dumped cold water
on those reports, noting that sales remain 42 percent below the
year-ago pace and are at their lowest level in 17 years.
No Cause for Celebration
“The fact that new home sales are up slightly
from a dismal beginning to the spring home buying season in
March is not much to celebrate,” Sandy Dunn, president of the
National Association of Home Builders, observed. Robert Toll,
CEO of Toll Brothers, confirmed that painful assessment in an
interview with Bloomberg News, describing the number of
prospective buyers viewing his company’s homes as “the worst
we’ve ever seen.”
The inventory
of new homes available for sale has declined slightly to a 10.6
month’s supply in April from 11.1 months in March, but the March
inventory includes 189,000 completed homes plus another 200,000
homes still under construction and as yet unsold, and “those two
figures have never been so close since the government began
collecting that data in 1970,” the New York Times
reported recently.
Existing home
inventories are similarly bloated, with an 11.2 month’s supply
in April —10.5 months if you exclude condominiums and town
homes, which have a 14.2 month inventory of their own. And
those statistics don’t include the “shadow inventory” of homes
that owners have withdrawn from the market or declined even the
attempt to sell.
“I’m not sure
how you measure it, but there are a lot of pent-up sellers,”
whose homes aren’t reflected in the inventory data, Mark Zandi,
chief economist for Moody’s Economy.com, told the Christian
Science Monitor. Those “pent-up sellers” will return, Zandi
says – and presumably, so will all the pent-up buyers – “once
the market finds firmer ground.” The question is when that will
be and the answer, based on current statistics is – probably not
any time soon.
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