Housing healing
More than six years after its spectacular collapse, the U.S. housing market – the laggard of the struggling economic recovery – may be poised for pickup, driven in part by an upswing in remodeling, Bank of America-Merrill Lynch economist Michelle Meyer thinks.
Gains are likely to be modest at first, and are subject to volatility since overall economic growth may well slow in the second half of this year. Also, given the deep hole housing has fallen into, the market is still far from a robust recovery, Meyer wrote in a note to clients drawn from recent research.
Still, some evidence points to the beginnings of an upswing. For one, data already indicate a rebound in spending on renovations. Remodeling will pick up steam as investors convert foreclosed properties into rentals, and homeowners who have held off doing repairs or additions decide the time is ripe, Meyer said.
Stronger housing markets are also likely to be supported by a reversal of declines in household formation, which slowed dramatically as graduates opted to live at home or as people who lost their homes through foreclosures went to live with relatives or friends, she said.
Meyer and her colleagues also see an unleashing of pent-up demand for homes among homeowners who have put off the voluntary move up to a larger or more expensive home:
The long-awaited recovery in one of the most depressed sectors in the economy has begun, but it will be a long journey.
from Lawrence Summers:
It’s too soon to return to normal policies
Economic forecasters divide into two groups: those who cannot know the future but think they can, and those who recognize their inability to know the future. Shifts in the economy are rarely forecast and often not fully recognized until they have been under way for some time. So judgments about the U.S. economy have to be tentative. What can be said is that for the first time in five years a resumption of growth significantly above the economy's potential now appears as a substantial possibility. Put differently, after years when the risks to the consensus modest-growth forecast were to the downside, they are now very much two-sided.
As winter turned to spring in 2010 and 2011, many observers thought they detected evidence that the economy had decisively turned, only to be disappointed a few months later. A variety of considerations suggest that this time may be different. Employment growth has been running well ahead of population growth. The stock market level is higher and its expected volatility lower than at any time since the crisis began in 2007, suggesting that the uncertainty hanging over business has declined. Consumers who have been deferring purchases of cars and other durable goods have created pent-up demand. The housing market seems to be stabilizing. For years now, the rate of family formation has been way below normal as young people moved in with their parents. At some point they will set out on their own, creating a virtuous circle of a stronger housing market, more family formation and demand, and further improvement in housing conditions. Innovation around mobile information technology, social networking and newly discovered oil and natural gas is likely, assuming appropriate regulatory policies, to drive significant investment and job creation.
True, the risks of high oil prices, further problems in Europe, and financial fallout from anxiety about future deficits remain salient. However, unlike in 2010 and 2011, it is probable that these risks are already priced into markets and factored into outlooks for consumer and business spending. There has already been a significant escalation in oil prices. The European situation is hardly resolved but is unlikely to deteriorate as much in the next months as it did last year. And market participants report great alarm about the deficit situation. So it would not take great news in any of these areas for them to actually contribute to upward revisions in current forecasts.
What are the implications for macroeconomic policy? Such recovery as we are enjoying is less a reflection of the natural resilience of the American economy than of the extraordinary steps that both fiscal and monetary policymakers have taken to offset private-sector deleveraging -- a process that is far from complete. A convalescing patient who does not finish the full course of treatment takes a grave risk. So too the most serious risk to recovery over the next several years is no longer the possibility of either financial strains or external shocks but that policy will shift too quickly away from maintaining adequate demand toward a concern with traditional fiscal and monetary prudence.
On even a pessimistic reading of the economy's potential, unemployment remains 2 percentage points above normal levels; employment, 5 million jobs below potential; and GDP, close to $1 trillion short of potential. Even with the economy creating 300,000 jobs a month and growing at 4 percent, it would take several years to reattain normal conditions. So a lurch back this year toward the kind of policies that are appropriate in normal times would be quite premature.
Indeed, recent research on what economists label hysteresis effects suggests that slowing could have highly adverse consequences. Brad Delong and I argue in a recent paper that it is even possible that premature and excessive movements toward fiscal contraction by shrinking the economy risk exacerbating long-run budget problems.
How then to respond to valid concerns about fiscal sustainability, excessive credit creation and the eventual return to normality in a world where policy credibility is essential? The right approach is to pursue policies that commit to normalize conditions but only when certain thresholds are crossed. The Federal Reserve might commit to maintain the current Fed Funds rate until some threshold with respect to unemployment or expected inflation is crossed. Commitments to fund infrastructure over many years might include a financing mechanism such as a gasoline tax that would be triggered when some level of employment or output growth has been achieved. Tax reform could phase in new rates in pace with the rising economic performance.
You state “Economic forecasters divide into two groups: those who cannot know the future but think they can, and those who recognize their inability to know the future.”
From the tone of this article you apparently belong to the first group.
U.S. retail sector perks up
One month’s data may not a trend make. Even so, this morning’s batch was pretty solid. U.S. retail sales rose 1.1 percent in February, the biggest gain in five months, and January’s numbers were revised up. Some of the rise reflected higher gas prices, but much of it appeared to be real.
The National Federation of Independent Businesses’ small business optimism index also rose, for a sixth straight month.
Eric Green at TD Securities says that as far as potential revisions to GDP forecasts, he’s keeping his powder dry for now:
This will probably lead to some upward revision in the monthly consumption data that feeds into GDP, but at the margin. The main weakness in recent consumption data has not been in objects you buy, take home, or eat, but in services which is not captured in the retail sales data. We keep our GDP forecast of 1.7%, one already predicated on very strong gains in consumer spending for February and March.
Economists at Goldman Sachs, however, thought differently:
A highly unequal U.S. recovery
No wonder most Americans feel like the recession never ended. A new paper from Emmanuel Saez, a Berkeley professor and expert on inequality, shows the overwhelming majority of income gains – 93 percent – accrued in 2010, the first full year of the U.S. recovery, went to the top 1 percent richest Americans. (Thanks to our friends at Counterparties for bringing the paper to our attention.)
The research suggests economic growth, even if it gathers speed, will not be nearly sufficient to close the income gap that has been the target of national Occupy protests. Instead, only drastic tax reforms of the sort seen during the 1930s might do the trick.
In 2010, average real income per family grew by 2.3% but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover.
National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly. Unemployment and non-employment have remained high in 2011. This suggests that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007.
Looking further ahead, based on the U.S. historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.
The Great Stagnation
Federal Reserve Chairman Ben Bernanke’s verdict on the U.S. economy is sobering. Boiled down, this was the message delivered at his news conference today:
- Brace for roughly three more years of sluggish growth – or longer
- Some of the unemployed will not find work in the foreseeable future
- America’s economic power has downshifted
- Global financial markets could upend recovery yet again
It is a bleak outlook. Bernanke has left little doubt that he sees the United States in the midst of very long and painful period of sub-par growth, dousing some of the optimism stirred by recent reports that showed unemployment falling, the housing market hitting bottom and businesses starting to spend again.
Conditions could worsen, especially if the European crisis deepens and tips the world back into recession as the IMF warned this week. Bernanke said the central bank is ready to pump even more cash into the economy to keep it afloat if necessary. And by formally announcing for the first time that the central bank has inflation target of keeping prices at 2 percent, Bernanke has bought himself the leeway to provide extra support to growth without stoking inflationary fears.
He may need to use the wiggle room. If the Fed’s outlook proves correct, it will have taken 7-1/2 years from the time the credit bubble burst in 2007 for the U.S. economy to find its moorings – the worst performance since the Great Depression. And some of the 17 Fed policymakers are even more gloomy. Rates on hold at least until 2014 was the central view, and six of the Fed officials see no need to raise interest rates until 2015 or 2016. Think about that – a decade of virtually free money for banks.
Here are the numbers that tell the tale. The Fed lowered by a notch its assessment for trend growth to the 2.3-2.6 percent range. Only seven months ago it had estimated healthy growth in the order of 2.5-2.8 percent. Maximum employment now is seen in the 5.2-6.0 percent range in the longer run. In the boom years, full employment was under 5 percent. Bernanke also said some of the unemployment now is structural – meaning that discouraged people have permanently dropped out the workforce or lost the skills needed to get jobs today.
No wonder people are buying gold.
Conflicting signals for U.S. economy
As 2011 draws to an unspectacular close, U.S. economic data are sending thoroughly mixed messages about the near-term path of the recovery. That’s not particularly reassuring given the still enormous risks emanating from Europe – but it’s better than the unequivocal weakness that prevailed during the first half of the year.
Consumer confidence offered some reassurance, jumping to an eight-month high in December and showing other encouraging signs as well as Eric Green of TD Securities explains:
The better than expected consumer confidence numbers (64.5) put confidence, like most measures of economic activity, back to the levels of early spring. Views on the labor market, however, look to be rising at a much better clip. The labor differential (between jobs plentiful and hard to get) continued to improve. That measure tracks the unemployment rate very well. It rose in December from -37.4 to -35.1. That remains exceptionally weak, but it is the trend that matters. That trend has improved decisively over the past several months and is now well above the spring levels that averaged closer to -39, and is the highest since the end of 2008.
Still, a much sharper-than-expected fall in U.S. home prices for October, while relatively stale as a data point, was enough to remind the Wall Street crowd that this fundamental source of growth remains in a rut with no end in sight. U.S. home prices peaked in mid-2006 and have since dropped by about a third nationwide, with much steeper plunges in the hardest hit parts of the country.
Nomura’s Aichi Amemiya reminds clients of the foreclosure glut still to hit housing:
The recent positive momentum of home sales data has not carried over into housing prices. The Case-Shiller house price index showed a continued decline on a month-over-month basis in October. The monthly rate of change was -0.62% in October, following -0.66%% in September (Consensus:-0.34%). The pace of the decline was faster than the market expectations. […] An expected surge in foreclosure activity will likely become a burden on prices. Realtytrac, a private online marketplace for distressed properties, said in the recent foreclosure report, ‘November’s [foreclosure] numbers suggest a new set of incoming foreclosure waves, many of which may roll into the market as REOs or short sales sometime early next year.’
from Davos Notebook:
Tigger bounces back in the boardroom
CEOs are, of course, ebullient by nature.
So it's no surprise that confidence about growth prospects is bouncing back as emerging markets continue to barrel along and even sluggish developed economies show signs of recovery.
What is, perhaps, remarkable is just how far confidence has returned. The latest survey of 1,201 company bosses by PricewaterhouseCoopers shows it is back almost to pre-crisis levels.
But how much should we trust the bouncing boardroom Tiggers? There are also plenty of Eeyores in Davos, warning about fiscal deficits, growing economic imbalances and the rising threat from inflation.
Transforming the FIRE Economy
What went wrong and where we should go are topical post-crisis discussions and many books have been dedicated to tackle this question.
Eric Janszen, U.S.-based economic analyst, is the latest in analysing the crisis and its aftermath. He thinks that the problems of the global economy are rooted in the flaws of the debt-driven FIRE Economy (Finance, Insurance and Real Estate) and the only way out of the crisis is to change the fundamental approach.
“The entire economic system has been glued together by one profound fantasy: Finance can substitute for production, and credit for savings. Private debt, of households and businesses, and public debt, of governments federal, state, and local, foreign and domestic, piled up like snow by a blizzard of lending through mortgages, bonds offerings, and securitizations over decades. It then avalanched upon us,” Janszen wrote in his new book.
In his view, reindustrialisation is the key and the absence of a fundamental change will sow seeds for future crises.
“If we continue on our current path, we will recreate a version of the economy that just failed, except it will be one with new potential for mayhem in the future, that of a government debt crisis instead of the private debt crisis we had in 2008 and 2009,” Janszen says.
“We can nurture the seeds of a new American industrial economy — a productive economy that generates profits from technological industries such as computers, biology, medicine, and high-technology materials — by cultivating next-generation transportation, energy and communications infrastructure… We all must work to phase out the FIRE Economy and develop the TECI Economy.”
Please check the Author, you are referring to him three times, all the time the spelling differs.
Thank you
Mission not accomplished at central banks
U.S. and Japanese monetary policy does not always move hand in glove, but meetings of the countries’ respective central banks in the next few days are likely to spell out the same thing — that the job of economic recovery is by no means over.
It is almost a dead cert that the Federal Reserve will keep interest rates where they are and a high probability that it will renew its view that we can expect an “extended period” of ”exceptionally low” rates. It is likely to stick to its plan to end purchases of around $1.7 trillion in assets. But it could well leave the door open for a renewal of purchases at a later date should economic expansion fall back.
The message: Mission not yet accomplished.
The Bank of Japan may prove even more dovish. It is under pressure to get even looser than it already is, most likely by increasing funds offered under its lending operation. This is partly because of weakening price trends and worse fourth quarter growth than expected.
The message: Mission even less accomplished.
A third confirmation is likely to come from the minutes of the Bank of England’s last meeting. expected to show unanimous support for keeping interest rates at their rock bottom level in the face of fragile economic growth.
As a result of this kind of thinking, there are increasing noises from some investors about the danger of the global economy slipping back into recession and equity markets revisiting the lows of March 2009.
Watch out for inflation in the back half of this year – that’s gonna really stress the federal banks around the globe
Chicago and the toddlin’ recovery
It may not get as much attention as the monthly employment report or GDP figures, but the U.S. Federal Reserve Bank of Chicago’s gauge of the national economy has a good track record of distinguishing economic expansions from recessions. And it’s suggesting that the U.S. recovery may be wobbling.
Over at the econbrowser blog, economist James Hamilton points us to a recent research paper that examines how accurate the various economic indicators are at telling us when the economy is growing or contracting. The Chicago Fed’s national index was one of the best. And Monday’s report shows it faded in October.
Not only that, but its three-month moving average fell to -0.91 in October from -0.67 in September, declining for the first time in 2009. That drop was especially significant because the Chicago Fed says a move below -0.70 in the three-month moving average following a period of economic expansion indicates an increasing likelihood that a recession has begun.
Of course, the people who are tasked with determining when recessions begin and end haven’t called the latest one over yet. So is this report showing a speed bump on the way to a recovery or something more ominous?
