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:
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.
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 decline in cash-out refinances as home price appreciation stops and then reverses. This is well underway and was apparent in the fourth quarter of 2006. Confirmed by all reports; the extent is unknown. By some estimates, cash-outs were responsible for 4-5% of recent consumer spending. If this drops by only a quarter it will have a significant effect amounting to a 1% spending decline. See Calculated Risk on this issue.
- Inflation for basic consumer necessities (including gas) that outpaces wage increases. This is very apparent and appears to be accelerating - it is definitely causing a pull-back in some discretionary spending. Confirmed by retail reports; the effect is likely to be at least 1-2% if inflation continues at this pace. Consumer spending is often cited as being 70% of GDP. Let's call it 60%.
- Astronomically high consumer debt totals. I have written about this often, and cited a ton of reports showing just how much debt has increased. The only thing that has masked the effect of consumers having to repay the debt was the refinancing of mortgages and shifting the debt into lower interest rate and slower repayment schedules. That is now abating, and the result of inflation for basic needs and the need to repay debt from earnings will cause less spending over time. Lord only knows how much this will cost, but 30% default interest rates on credit cards can wreak havoc. With the average family having at least 8,000 in CC debt, I have to believe that this will result in a minimum 1% decline.
- A decline in building employment and spending. This appears to have begun and is most certainly going to accelerate. Confirmed by value of construction, permits and starts figures (although these show it is just beginning). Causes a drop in related industry employment, which is confirmed. This has already occurred in manufacturing and supply industries such as appliances, lumber, plumbing, lighting, windows and doors, as well as of course the individuals putting such items into place. Related declines and layoffs occur for mortgage brokers, realtors, and bank employees. Confirmed by multiple sources.
- A decline in government employment and spending in the worst-hit areas. This is now being confirmed in localities in Florida and California, and it will spread. I have seen several quotes of a 10% drop in anticipated revenue and corresponding budget cuts. Anecdotal confirmation.
- Extremely high local and state debt levels in many areas mean that government spending is going to be impacted rather severely by a decline in revenue. Confirmed.
- As consumption drops, forecasts for sales and profit for consumer discretionary items decline, and these companies cut costs, spending and employment. A drop in business investment is being widely discussed, and multiple electronic companies, such as Circuit City, Best Buy, Sprint, Motorola are planning layoffs to compensate.
- The wave of resets and rate adjustments is supposed to accelerate rapidly through 2007, and I expect it to peak in 2008. This is confirmed by rapid increases in defaults and Notices of Default which are escalating around the nation. Many of these homeowners will not lose their homes, but the lower refinancing rates reported by MBA show that tightening credit and declining home appreciation will force many homeowners to pay the higher amounts rather than refinancing. This will cut into spendable income and cause further consumption drops. Confirmed by all reports, although extent is unknown.
- A decline in retail and service employment. This is not confirmed but is strongly suggested by the last ISM report and by the Monster listings.
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.
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".
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.
"“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.’”
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.
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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