Posted by Michael A. Kamperman on October 29, 2009
The third quarter GDP rose by 3.5%. Media outlets and economic pundits have hailed the report as irrefutable evidence the recession is over. It is not over. Consider that 1% of the gain came from a decline in the decline of inventories. The country shrank inventories at an annualized rate of $130 billion in the third quarter. But because that was an improvement over the second quarter the alchemists consider this negative a positive. A careful reading of the GDP report shows that 1.66% of the gain came from an increase in auto production. This is attributable to a combination of the cash for clunkers program and of GM and Chrysler restarting production that was totally shut down for parts of the second quarter as they went through government controlled bankruptcy proceedings. In September auto sales fell back to depression levels once the cash for clunkers program ran its course. Residential fixed investments increased 23.4% in the third quarter after decreasing 23.3% in the second quarter. But in September sales of new homes fell 3.6%, while sales of existing homes rose 9.4%. This is due to the first time home buyers tax credit. The discrepancy between existing homes sales and new home sales is because in order to qualify for the credit a buyer must close on the home by November 30 and new home cannot be built in less than 90 days. This indicates that just like the cash for clunkers program as soon as federal government stimulus is removed from the marketplace depression level final demand resumes. There is a real possibility a new home buyers tax credit will be extended in some form. However, it will probably not juice sales as much as the last tax credit since everyone who was waiting to buy a home ran out and bought one to take advantage of the tax credit. In other words in both situations demand was pulled forward. The collapse in consumer confidence in October and the persistently high rates of weekly jobless claims indicate the underlying fundamentals of the economy have not materially improved. The banks are still tightening lending and as long as that continues the depression will continue.
The GDP report revealed some stark weaknesses in the economy that will eventually drag the whole economy down again. First and foremost state and local government expenditures shrank by 1.1%. The decrease in tax revenues means local government spending will remain weak for an extended period of time. Also, non-residential spending decreased by 2.5%. The commercial real estate market is flat on its back and will only continue to contract going forward. Finally, disposable personal income decreased by $20.4 billion in the third quarter. This means the 3.4% increase in consumer spending is not sustainable, especially if the consumer remains unable to borrow their way to prosperity.
The real tragedy about the 3rd quarter positive GDP report is the high fives at the Whitehouse and Federal Reserve will prevent much needed economic assistance from Washington making its way to Main Street. The real measure of economic growth is jobs. Unless the federal government statisticians again drop hundreds of thousands of people out of the workforce the unemployment rate will rise to 10%, or higher in next Friday’s report. If not for the federal government dropping 1.5 million people out of the labor force in the last few months the official unemployment report would already be close to 11%. The Obama administration can only hide their heads in the sand like Ostriches for so long. If the new Hoover administration doesn’t get their act together by creating millions of jobs soon they will be looking at a Republican controlled Congress in 2010.
Posted by Michael A. Kamperman on October 28, 2009
Next week the Federal Open Market Committee will meet to determine whether to or not to change their near zero interest rate policy and whether or not to signal an exit strategy from quantitative easing to those concerned about runaway inflation and the fall of the dollar. Absolutely without a doubt the Fed needs to ignore the voices calling for a clear exit strategy and needs to up their program of quantitative easing to purchase more U.S. Treasury bonds. The real economy remains in terrible shape and deflation is gaining traction in the U.S. and global economy. Without a boost from the first time home buyers tax credit new home sales started falling again in September, because there was no longer enough time to complete a new home and close by the November 30 deadline. Consumer confidence numbers are falling hard again, which will further dampen consumer spending. This is also a clear signal the job market has a giant need not apply sign attached to it. The Fed cannot meet its mandate of full employment without being much more aggressive by printing more money.
Following World War I the Weimar Republic of Germany faced numerous challenges. They were saddled with crippling debts known as war reparations and they were facing inflation rates running as high as 60%, because wealthy Germans sought to move cash to hard assets and foreign assets as quickly as possible. It was into a high inflationary environment with full employment that the Weimar Republic chose to indiscriminately print money. Additionally, the rest of the world did not share Germany’s problems and currency traders were able to punish the Mark on global currency markets. We are in a deflationary environment and we have high rates of unemployment. And, outside of China the rest of the world does share our debt-induced deflationary depression. Germany experienced hyper-inflation because they chose to print money at the worst possible time. We have the ideal circumstances to print money in the U.S. In fact, if we don’t print a lot more money the economy is going to slide a lot lower. There is simply no other way to service all of the global debt. Whereas Germany threw gasoline on an inflationary fire, outside of a few speculative commodities we are desperate to spark inflation in the real economy. There is a time and a place for everything and now is the time to print.
The Fed needs to print enough money that policy makers in Washington will be relieved about worries over the national debt and the federal budget deficit. By taking near term debt worries off the table the Fed can clear the decks for Washington to come forward with a desperately needed massive job focused stimulus bill. There is no longer any reason to quibble about whether the last stimulus bill was adequate to restore economic growth. It is time for President Obama to admit the economy is in worse shape than his economic teams worst case projections. Unless the deficit and defense of the prior stimulus bill comes off the table we will not see a serious jobs bill emerge from Congress. It is up to the Fed to signal all is not well with the economy and to start aggressively buying U.S. Treasury bonds.
Posted by Michael A. Kamperman on October 26, 2009
The number one issue in America is jobs. The number two issue in America is jobs. The number three issue in America is jobs. Yet somehow the Whitehouse remains tone-deaf to the cries and lamentations of the American people. The President is much more interested in minimalism when it comes to any job creation efforts than he is in risking raising the deficit higher than it already is. However, if you’re the world’s biggest currency manipulator named China and you complain about the U.S. printing money the President is all ears. If you run around saying we are stealing from our grandchildren by increasing the national debt the President is easily cowered. But if you are some poor Joe or Jane without a job the President is willing to give you a few more weeks of unemployment benefits, and not much else. He is certainly not willing to create a job for you.
A friend of mine lost his job as an architect one year ago. His unemployment benefits just ran out. Because of the commercial real estate bust no architectural firm is hiring. Its not that he can’t compete for a job, there are no jobs to compete for. What good will a few more weeks of unemployment insurance do him in the big scheme of things? When those checks run out there will still be no jobs available for him.
What the President needs to do is provide the change we can believe in that he campaigned on. Rhetoric and flowery speeches will not put food on the American workers table. We need action. The President should come forward with a two year one trillion dollar infrastructure bill that would repair or replace roads, bridges, federal government buildings, national parks, and schools in poor districts. The President should also remind the Fed that unemployment is their most important mandate right now, not inflation. He should have a meeting with Ben Bernanke and tell him if he doesn’t up the quantitative easing program at the next meeting he will pull his nomination for a second term. Basically, we need for the President to become proactive on the jobs front and take charge. Finally, he should fire all of his economic and political advisers that are counseling him to worry more about the deficit than about jobs. It is simply stunning how President Obama has surrounded himself with the same type of liquidationist advisers that President Hoover surrounded himself with during our last debt-induced deflationary depression. President Obama, you will not be able to re-create 10 million missing jobs on the cheap.
Posted by Michael A. Kamperman on October 22, 2009
The foreclosures and short sales are lined up to keep coming and coming and coming. The WSJ publishes a quarterly survey of real estate fundamentals for 28 metropolitan areas across the country. The news going forward is bleak. In Miami, almost 27% of all first lien mortgages are delinquent, which means they are 30 days or more past due. Imagine a situation where one in 4 homes could wind up in foreclosure sometime during the next couple of years. We have become so desensitized to bad news that we have lost our ability to interpret some of the data we are confronted with. This has now happened to the Journal’s reporter James R. Hagerty when he stated “by contrast, metro areas with relatively low foreclosures and mortgage delinquency rates include Boston, Denver, Minneapolis, and Seattle making them less vulnerable.” The delinquency rate in these cities is averaging 8%. This may be low compared to Miami, but historically it is a very high delinquency rate. Foreclosures started rising and home prices started falling at the beginning of 2007. The worst hit city in the survey in the middle of 2007 was again Miami, with a delinquency rate of 5%. The delinquency rate in Seattle was under 2%. Now, our best areas are in much worse shape than Miami was in the summer of 2007. Real estate prices collapsed in Miami from the second half of 2007 until now. There is no reason to think the pressure that distressed sales will place on home prices in our strongest markets will not drag home prices down much further. To translate, if 8% of the mortgages are delinquent then 1 in 12 homeowners risk foreclosure. This is an average of 1 potential foreclosed house per block. The unemployment rates are much higher in our strongest cities today than they were in Miami two years ago. And credit is much tighter.
Of course the reason so many mortgages are delinquent is that so many of them are underwater. When the borrower gets in trouble they are unable to sell the home and pay off the bank. Home sales and home prices were buoyed by the first time home buyers tax credit this year. Since the borrower must close by November 30 there will no longer be any sales tied to the tax credit. It is possible the tax credit simply pulled demand forward in the same way the cash for clunkers program pulled auto demand forward. After the clunker program ended auto sales went kerplunk. Home prices will probably go kerplunk too.
Needless to say the federal government needs to provide a lot more support to the single family housing market if it wants to see prices stabilize. Rather than another tax credit, we should let everyone who is not delinquent refinance with a 30 year mortgage at 4% interest. Importantly, no credit check and no appraisal should be applied to borrowers who are current on their mortgages. The existing title policy and survey should be kept in force. The loans should be made with no closing costs. This will lower mortgage payments for borrowers currently unable to refinance because their homes are underwater, or they have become unemployed, or their credit is now subprime. Lowering mortgage payments will decrease future delinquencies and raise disposable income for millions of Americans putting people back to work. The federal government already is backing over 80% of all mortgages in America. Anything they can do to stabilize home prices will save the taxpayers a lot of money down the line.
Posted by Michael A. Kamperman on October 20, 2009
The Whitehouse needs to stop defending the stimulus plan and come forward immediately with a big and bold job creation plan. The one part of the stimulus plan that most people agreed would create new jobs was fast forwarding funding for shovel ready infrastructure jobs. Well don’t hold your breath. Proof has just emerged that the stimulus plan is not only failing to create infrastructure jobs as promised; it is now failing to save even previously budgeted infrastructure jobs. A few days ago federal and state transportation officials told local planners in Texas they would need to significantly restrict their previously budgeted spending on roads and bridges for the next two years. In fact, the only money available for state and federal highways is whatever funds local transportation authorities have received directly from the stimulus plan, and nothing else. The Waco Tribune Herald quoted Waco MPO director Chris Evilia as saying “If it’s not economic stimulus, it’s pretty much a no go for the next two years.” She described the turn of events as a “complete meltdown.” The Waco area is slated to receive $7.2 million from the stimulus plan for roads and planned to use the money for a needed overpass on highway 6. Still, the stimulus money will not be diverted to higher prioritized projects but to routine road maintenance. Without stimulus money the area already planned to widen parts of I-35 and to build an overpass on highway 84. Those two top priority projects will now have to wait for future funding, since the expected annual road money is no longer coming.
We are in a federal and state funding crisis due to a lack of tax receipts because of the economic crisis. Jobs widening I-35 that would have existed anyway without the stimulus plan will now not exist even with the stimulus plan. It is simply stunning things are unraveling so fast at the federal and state level. It is imperative the Whitehouse put together an emergency spending bill to restore fully all budgeted transportation funds without using funds from the stimulus plan to cover the normal budget. The word stimulus means an extra spark. It does not mean replacement money.
There is no doubt we need much higher levels of federal spending to stabilize the economy. There is no doubt the Federal Reserve needs to print a lot more money. What is doubtful and what is an open question is whether or not President Obama has the wisdom and the courage to stand in front of the American people and tell them the economic crisis is proving to be more severe than he and his advisers realized. He must come forward with a one trillion dollar job creation program as a minimum down payment if he wants to see unemployment go down. It is also doubtful whether or not Fed Chairman Bernanke will push through another round of quantitative easing at the Fed’s next meeting. The economic crisis will not end until the President is willing to use all of his political capital on creating jobs.
I need to offer a mea culpa and a retraction. Earlier I attempted to coin the phrase the “Great Unraveling” as a term to describe how the economic dominoes are continuing to fall into each other causing more and more economic losses. The recent cut in highway funds is a perfect example of why we are in a depression and why it is not close to being over. However, it has been brought to my attention that Paul Krugman published a book in 2003 titled The Great Unraveling: Losing our Way in a New Century, which is a collection of his New York Times columns railing against President Bush’s economic policies. At least I have seen Professor Krugman forced to issue retractions of his own.
Posted by Michael A. Kamperman on October 16, 2009
In today’s New York Times David Brooks advocated the same policies in the middle of an economic depression that the Liquidationist’s advocated in the early 1930’s. We know how that turned out. They worshipped at the mystical alter of gold. They believed money was finite and a zero sum game. They preached balancing the budget and creative destruction. To stop the deflationary economic decline FDR ditched the gold standard. Even then the country remained in a depression until the U.S. went on a wild spending spree to fight World War II. It was wild government spending that launched a 62 year economic boom. Surely we have advanced enough to know we can enact the same massive spending programs to end this depression without actually going to war. Today money is not finite since we have a fiat currency. Yet you would have us live in a finite world. Why do you obsess over the debt and the deficit when the federal government has the power to print what it owes? You are trapped in 19th century thinking in a 21st century world. This obsession leads you to worry about the growth in entitlement programs such as Social Security and Medicare.
The federal government should not worry about the deficit or the debt right now. Only after the economy recovers should it return to fiscal responsibility. The most effective stimulus plan we could have would be to give everyone on Social Security a 20% raise and lower the eligibility age for Social Security and Medicare to 60. This would simultaneously restore consumer confidence and spending, open up jobs for younger workers, and lower health insurance premiums for employers. When more money starts moving around the economy, then federal tax revenues will go up. Sometimes you have to spend money to make money.
Most people place far too much faith in econometric forecasting models that project huge future deficits 50 years out. Did these models forecast the current economic crisis? Why should we believe they will be accurate so far out into the future when they can’t even accurately predict a few months out? Your concern about our entitlement programs is they have unfunded liabilities because the revenue sources to pay for them have yet to be identified. Well, when I was in my early 20’s if I was going to live for the next 50 years I would have to eat for the next 50 years. But I didn’t even have the money in the bank to pay for 2 years worth of groceries, no less 50. Somehow I have managed to eat for the last 25 years even though my food budget was an unfunded liability. Right now we should focusing on creating jobs and not focus on the federal budget deficit or the federal debt.
Posted by Michael A. Kamperman on October 14, 2009
It may happen as soon as tomorrow. The core rate for CPI includes everything except for volatile food and energy prices. Over the last 12 months the overall CPI rate has declined by 1.5%, primarily due to a pullback in food and energy prices. But for the most part the Core CPI rate has risen slightly month after month despite rampant deflation. Over the last year the CPI has calculated that rents and owner’ equivalent rents (the economist’s substitute for home prices) have risen by an annualized rate of 1.8%. It is mindboggling that the federal government’s statisticians have been using the cost of renting shelter as a substitute for actually buying a house. Everyone knows home prices have dropped dramatically during the last 2 years. The reason the Core CPI rate is about to turn negative is rents are now rapidly falling throughout the U.S. Rent and owner’ equivalent rent combined account for 30% of the overall CPI calculation. Importantly, they account for 40% of the Core CPI calculation. Most economists and investors pay much closer attention to the core rate than to the overall rate due to the volatility of food and energy prices. This summer apartment vacancies reached 7.8%. Landlords are forced to lower prices to attract tenants. Once the Core CPI rate turns negative it will confirm the U.S. is in a deflationary spiral brought on by the credit crisis.
The CPI rate is built into many contracts and negotiations in the U.S. Most employers’ base raises for employees on a cost of living adjustment, plus potentially something extra for merit. With the Core CPI rate trending negative the only raises given to U.S. workers will be for merit. Stagnant and potentially falling wages in the U.S. will only lead to lower prices as consumers and businesses are strapped with excessive debts. They need the forces of inflation to raise their incomes and the prices of their assets to service their debts. This year people on Social Security did not receive their usual annual cost of living raise. Less income will lead to lower top line revenues for businesses. This will mean cost cutting will be the only way maintain or grow profits. In the U.S. cost cutting for businesses is code for more layoffs. Getting out of this deflationary spiral will be very difficult because of the way incomes in the U.S. are tied to the CPI rate.
The Fed is currently pushing on a string and has been unable to get the Zombie banks to increase lending. The only way to fight deflationary expectations is for the Federal Reserve to print a lot more money. Yet some members of the Fed would like to exit their quantitative easing program believing the economy is recovering and inflation is around the corner. These attitudes should change once the Core CPI rate confirms deflation. The good news is the release of minutes from the Federal Reserve’s last meeting showed that some members of the Fed are still open to upping the quantitative easing program.
Posted by Michael A. Kamperman on October 11, 2009
The Whitehouse and Congress are looking at the looming 2010 elections in conjunction with the rising unemployment rate and are beginning to sweat. The realization has hit home that rhetoric alone cannot gloss over the fact that the stimulus bill has failed to create jobs and stem the rise in the unemployment rate as promised. A new package of measures to stop the nation from hemorrhaging jobs is about to be on the table. However, constraining a truly transformative job creation bill will be an emphasis to limit increases to the federal budget deficit. Therefore, whatever emerges from Congress will be limited and targeted. It will also be designed to be politically palatable to independents that will prove to be pivotal in choosing our next Congress in 2010. While I believe that we should ignore increases in the federal deficit and should print money to repurchase most of our outstanding U.S. Treasury bonds, the political reality is the deficit hawks will be able to control and limit the size of the next round of federal job creation stimulus. Hence, we must get the maximum bang for the job creation buck. The question Congress and the country should be asking is which comes first – demand for goods and services, or jobs? Most mistakenly believe that the key to re-igniting demand is job creation. The simple premise is people will spend if they have a job. But in my mind they are getting the cart before the horse. Businesses do not need incentives to hire workers they do not need. Businesses will hire workers when they see top line revenue growth and their existing workforce unable to keep up with demand.
One of the ideas rising to the top of the heap in Congress is a job creation tax credit worth $3,000 to $5,000 depending on the wages for the new job. This idea is deemed palatable to a broad cross section of the electorate. Yet, I do not know of any business person that will spend $36,000 to create a job they don’t need just to save $3,600 on their income taxes. The tax credit will wind up as a windfall going to the few businesses that are seeing top line revenue growth and already need more workers. This ineffective job creation tax credit idea will consume most of the stimulus money on the table and will not solve our unemployment crisis.
If the federal government is going to spend money to create jobs, let’s let the government create the jobs it knows how to create best – government jobs. In the September unemployment report we lost over 50,000 full time government jobs, mostly at the state and local level. Those lost paychecks count just as much as lost private sector paychecks when you own the local restaurant, drycleaners, or community bank. This year over 40,000 teachers were pink slipped and not returned to the classroom. We should start by spending money to hire these teachers back. In my community of Waco, Texas, we need to expand I-35 in the northern part of the county and we need to build an overpass on Highway 84 where a new intermediate school is being built. But there are only funds to choose one of the shovel ready projects. If the federal government would increase it’s spending on the type of infrastructure projects the government normally spends money on, then private sector jobs would be created to build the overpass that seems to be out of the running for funding. We will get the most bang for the buck if the federal government focuses on doing what it does best. To really create jobs and significantly lower the unemployment rate, the Federal Reserve will need to print a lot of money and the Whitehouse will need to come forward with a massive Marshal style Plan for job creation. A couple of hundred billion dollars isn’t going to significantly lower the unemployment rate. Perhaps the President will get the message to push all in on the economy in 2011 when the 2012 election looms even larger for the Whitehouse and the unemployment rate is much higher than it is now.
Posted by Michael A. Kamperman on October 9, 2009
Some Governors at the Fed have recently been speaking out about the need for a rapid exit strategy from the Fed’s accommodative policies. They must think a speculative pop in the markets is equivalent to price stability and economic stability, which are the two things the Fed is charted by Congress to focus on. Is the home listed from a realtor down the street from you in a bidding war? Is your friend from college who has been unemployed for a while inundated with job offers? The American people are suffering. They are unemployed and they cannot sell their home because their mortgage is underwater. The objective of the hawkish Fed governors speaking about the need to have a rapid exit plan is not intended to push for interest rates to be raised in the near term. The comments are intended to push for an end to quantitative easing and the other policies the Fed has put in place to provide extra support to the economy. To date the Fed has done too little, not too much. Consumer credit fell another $12 billion in August despite getting a big boost from auto loans because of the cash for clunkers program. The banks are continuing to tighten credit standards. Auto sales fell back to extremely depressed levels in September as soon as the clunker program ended. Home prices will begin falling again now that the first time home buyers tax credit is no longer driving home sales. How could anyone at the Fed be worried about exit strategies when the real U-6 unemployment rate is 17%.
The hawkish Fed governors are simply too concerned about inflation returning. They see the dollar falling and gold reaching new highs and they assume the markets are signaling significant inflation is just around the corner. Not a chance. Real wages in the last unemployment report rose by only a penny over the preceding month. Hours worked fell to 33.0. Every industry has significant amounts of idle capacity. Inflation comes from too many dollars chasing too few goods. Since over half of the country has a subprime credit score, access to cash to purchase goods is restricted. Since industrial capacity is still way below 80%, there is no shortage of goods in any sector of the economy. Until these dynamics change there is no reason to fear inflation. It doesn’t matter how high gold gets, because the fundamentals of the economy will not support inflation.
What the hawkish Fed Governors should be panicked about is deflation. The fundamentals of the economy point to deflation. In the Great Depression deflation ended in 1933 after FDR declared a bank holiday and created FDIC, which ended the bank runs and brought money out from under the mattresses and back into the banks. He also ended the physical exchange of paper dollars for gold. He ordered the conversion of gold money for $20.67 per ounce in U.S. paper dollars. Then, in January of 1934 FDR devalued the dollar by 40% by raising the gold per ounce conversion rate to $35. We have no such tricks up our sleeve today to end deflation. What we do have to end deflation is quantitative easing. The Fed Governors need to be talking about why they need to print more money rather than how quickly they are prepared to withdraw support for the economy.
Posted by Michael A. Kamperman on October 6, 2009
Historians look back on the Great Depression of the 1930’s and assure us that things turned out much worse than they could have because of policy errors from both central banks and governments. Australia just committed a significant policy error by raising their short term interest rate by a quarter of a point to 3.25%. This sparked a surge in the Australian dollar. It also sparked a surge in gold. Only last week Australia pledged, along with all of the other G-20 nations, not to prematurely withdraw stimulus spending plans or to raise interest rates. But Australia quickly waived that pledge off by assessing that a short term liquidity driven speculative bubble in commodities prices brought about by artificial demand from China indicates their economy has recovered sufficiently enough to withdraw stimulus. Australia isn’t even going to wait to see if Chinese demand will continue once its 60 year anniversary eight day long holiday is over. Since much of the recent demand from China has gone into building inventories in warehouses rather than into finished goods for which few firm orders exist, it remains to be seen if China will continue to purchase commodities at a rate that significantly exceeds demand. I would not be surprised to see Australia reverse course and lower interest rates in a few months just like the European Central Bank was forced to do an abrupt about face when they prematurely raised interest rates last summer. Have Australian central bankers forgotten that only 6 months ago the prices of many of the commodities they track were much lower than they are today? Does Australia realize real final demand for most commodities has not risen substantially from 6 months ago?
Australia’s go it alone strategy will hurt strategic global efforts to coordinate economic recovery strategies between the major industrialized nations. Just how good is the word of any nation that participates in the G-20, including ours? It was only a few weeks ago we started a tariff raising tiff with China over tires. What the world needs from the G-20 is a firm understanding of the depths of the crisis and a clear and united vision on how to lead the world out of the crisis. It is clear Australia just doesn’t get it. Could beggar thy neighbor policies be far behind?
The question Bob Herbert raised in today’s New York Times is does President Obama get it? Bob questions why there is no bold job creation plan coming from the Whitehouse. The radio talk shows are now all quoting the U-6 unemployment rate of 17%. The pressure is building on the Whitehouse to create jobs. The early word is they are planning on extending jobless benefits and the first time home buyers tax credit. We already had these programs in place this September and still lost over a ¼ of a million jobs. Obviously we need something much bigger and much bolder than the $3,000 tax credit for new full-time jobs the Whitehouse is considering. Would you spend $30,000 to open up a job position your company doesn’t need just to get back $3,000? The economy needs real final demand to return. Real demand will not return until the global credit markets are fixed for small businesses and consumers, not just for mining giants in Australia enjoying a temporary windfall.
