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Thursday, April 12, 2007

Unemployment and General Situation

Hmm. This is the actual report, if you want to read it. You can find a link that will allow you to pull years of data in the previous post.

Updating the continuing claims saga from yesterday:
03/24/2007-2,492,000 (advance) 2,489,000 (final)
03/31/2007-2,527,000 (advance - will probably be revised down slightly)

So SA continuing claims did rise from the beginning to the end of the first quarter, but not in the normal numbers that occur in a recession year. You generally see it rise by a couple hundred thousand from beginning to end of the first quarter. The jury is out on this one, although job growth for 2007 is not a helpful factor for the economy - that's clear.

The headline everyone's running on this report is that initial claims rose by 19,000, after rising by 13,000 the previous week. That's seasonally adjusted initial claims. Actual numbers for initial claims:
3/31-268,046 (-5,400)
4/07-326,986 (+59,000)
We'll wait one more week to see, but the explanation that the SA is being messed up by spring break doesn't look too likely - there really was a much larger increase in actual claims than the SA version that everyone uses, so the spring break rise is being taken into account. The weather has been poor, and that could account for some of this (where is global warming when you need it?).

One theory, which is supported by the fall-off in wire transfers to Mexico, is that a lot of newly unemployed people who were working in contracting aren't being picked up in these numbers. A lot of them are illegals who won't qualify for unemployment or who won't apply.

That theory is also generally supported by the fall-off in sales tax receipts - although an alternate explanation for that decline is that inflation is causing quite a bit of it. In some states food isn't subject to sales tax, and if people are spending more of their available income on the basics, less would be spent on taxable items. However, the reported drop in sales tax receipts is largest in the states that were building the most, so it's likely that building-related unemployment is contributing.

General Situation:
Tom asked in the comments for a simply stated explanation why I believe that there will be a recession this year. The answer is that we are already seeing a real decline in consumption for certain areas, and as job losses mount this decline will continue. The causes and second and third order effects of consumption declines in sequential order:
A self-reinforcing cycle is in play, and further credit tightening would only exacerbate it. However, credit can now ease a bit and the cycle will continue.

Let's add up what we can reasonably quantify. The estimate is that nationally building accounts for about 20% of GDP. I've seen it called 23%, but let's use 18%. If it drops by a tenth compared to last year (apparently now pretty much set in stone), this would account for about a 1.8% drop in GDP. Add to that 3-3.5% off consumer spending for the causes listed above, which would cause approximately an additional 1.7% drop in GDP. That's over 3% off GDP without taking into account the secondary effects!. The auto slump is not helping either, and as jobs are lost, we will see an additional impact on GDP. That's where the concept of "stall speed" comes in. When things slow enough, businesses pull back a bit, which pushes us into a recession.

I hope this was clear enough. Ironically, spending money to keep consumers in homes that they really cannot afford is likely to make the situation worse rather than improve economic circumstances. All of these people who got into mortgages amounting to over 4 X annual income are in danger of losing their homes, and even if they don't, they will need to cut back on spending. California, in particular, will have very hard times coming. And what's the point of getting some poor schmuck to pay just interest on a principal balance for 20 years to stay in a home if that principal balance is 5-8 times the annual household income, and if the underlying asset is declining? There are areas in CA in which that is the norm for purchasers in the last few years. There's an unbelievable fall-out coming as a result. Orange County in CA is toast, grilled to a crisp, DOA.

The only thing that could turn this around now is for home prices to start increasing. If anyone has a theory about how that can happen in these bubbly areas, I'd love to hear it. At the beginning of the year I thought a drop in gas prices might compensate for some of the effects listed above (and of course a drop in oil price would cut basic inflation for many other items as well). Now it's too late.

The only thing that could turn this around now is for home prices to start increasing. If anyone has a theory about how that can happen in these bubbly areas, I'd love to hear it.

Just ask any Realtor, Real Estate Agent, or any other type of real estate pimp. They'll tell you how prices are going UP UP UP, prices have nowhere to go but UP UP UP, those who moved away can never return because they've been PRICED OUT FOREVER -- DON'T BE LEFT BEHIND!!!!!

The Headless Unicorn Guy

P.S. More foreclosures and open houses showing up on my street. Realtors still doubleplusduckspeaking the above party line. No effect at all on the million-$-plus highrise luxury condos announced around Anaheim Stadium (pouring concrete for the first story framing). However, the ones in downtown Anaheim proper look like at least the exteriors should complete before they run out of money, so I won't have to look at a "roof farm" of half-completed framing rotting away over the next few years.

With all the "Don't Be LEFT BEHIND!" attitude among the RE establishment, it seems very appropriate that one of the housing bubble blogs is named "Housing Armageddon".
Headless, recently I read about a skeleton from the 90's downturn that's still there. Someplace in NJ, I believe.

There seem to be a lot of stops, as the money runs out and no one wants to ante up further.

It's not going to be Armageddon unless you are the poor person left with the condo when the music stops. As you know, it's no picnic to be scraping along for 5 or so years to pay a mortgage on a place that's worth way less.
Oh - I forgot! Lereah is admitting the jig is up. From The Housing Bubble Blog:
"“The National Association of Realtors thinks the national median price for existing homes will drop this year for the first time since the organization began keeping records in the late 1960s.”

“‘My first thought was, ‘Wow, not even the spinmeisters at the NAR can sugarcoat the current market any longer,’ said Sarasota Broker Thomas Heimann. ‘My second thought was: I wish we’d only have a 0.7 percent drop in prices in our market.’”
You most certainly answered my question about your views on the cause of recession. Thank you.

At the risk of 'over staying my welcome', it would be very instructive to hear your response to those who do not think there will be a recession - i.e. what are they getting wrong.
Tom, for the most part they are looking at classic relationships which have held true post-war. If you look at LEI, for example, you will see that it is up because the stock market is up.

But what we are experiencing is an unusual set of economic circumstances during the post war period, and it is due to the sudden growth of non-regulated and securitized lending. Because everyone believed that he or she could off-load the risks to some other person while collecting a handsome profit, in the last five years credit standards have become laughable.

Last year in its summer issue the FDIC published an article about boom/bust credit cycles and the accompanying recessions. Here's my post about that. Because of the regulated nature of most lending post-war, the credit economy has been more stable than it was historically. The massive growth post 2000 of non-regulated lending changed all that, and so we are seeing a very different economic situation. I don't think a lot of economists have fully realized the consequences yet.

Conventional wisdom is that consumers stop spending as a result of economic downturns, rather than a pullback in consumer spending causing a full recession. It's logical enough. If a consumer loses a job or income, then the consumer will stop spending. In this case, consumers will be spending less before loss of job, which will cause businesses to draw back, and which has caused an economic downturn and will cause a recession.

Last year the Fed theory was that business investment would overcome a consumer spending decrease. However, we are not seeing that. Instead, we are seeing the reverse.
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