Economics Questions with No Quick Answers

It's easy to get exasperated these days with the stubborn sluggishness in the U.S. economy. One cause is the continuing dramatic correction in the homebuilding sector. Usually after a recession, the prevailing low interest rates encourage a rebound in new home construction and in sales of existing homes. Subsequent furnishing and/or remodeling spurs demand for furniture, appliances and other home accessories, setting off more generalized gains in retailing and manufacturing. At present, hardly any of this is happening as housing construction starts and home sales languish near record lows.

Lots of People Still Late with Mortgage Payments
As a career business economist, we wish we had some ready answers to this conundrum in a sector that ordinarily might lead a renewed and sustained expansion. What we can talk about are a couple of extraordinary and historic conditions that are contributing to the lingering economy-wide sluggishness. For instance, the Mortgage Bankers Association last week published the survey of its member institutions' delinquency and foreclosure trends for the second quarter of 2011. These new data show that 8.44% of all mortgages have payments past due. This figure has been steady since last fall, arresting an all-too-brief improvement that had begun early in 2010, when the portion with late payments pierced 10% of all mortgages being serviced by these firms. The traditional range for this late-payment measure is 4% - 5%. Mortgages badly past due, that is with payments more than 90 days in arrears, were 3.61% of total mortgages in the second quarter, also tracing a flat trend since last autumn after a partial improvement from an early 2010 peak. The historic level of this gauge of severely late payments is 0.5% - 1.0%.

We don't know, since we've never been at recent levels of these measures ever before, if these delinquency conditions have to improve first in order for consumer demand to be re-energized or if, instead, it goes the other way, and some kind of government policies to try to spur job creation are needed first in order to set off both consumer spending and an improvement in the loan delinquency situation. Note that this is just late payments, before we even get to foreclosure.

And House Prices Still Very Weak
House prices are intertwined with this. The Federal Housing Finance Agency, FHFA, last week released its latest data on home prices. Encouragingly, the basic, sale-related "purchase-only" index increased 0.9% in June from May, following 0.4% in May and 0.3% in April. The June amount is the largest monthly price increase since September 2005. However, it still leaves the index down 5.6% from a year ago and the resulting second quarter average only a minuscule 0.09% higher than the first quarter. Before late 2007, this price measure had never declined at all year-to-year; one version of the index runs back to 1975.

In this report, the FHFA included a new index based on more comprehensive coverage of purchase and financing transactions. This measure includes sales and also appraisals connected with mortgage refinancings. FHFA has consulted county registers of deeds and other sources to compile a series that now includes homes with so-called non-conforming mortgages, i.e., jumbo loans, and purely cash transactions that don't involve a financial institution. This index is compiled quarterly and called the "Expanded Data Home Price Index"; it was still declining in the second quarter, by 1.1% from the first quarter and it was down 6.1% from the year before.

If people feel nervous about the value of their homes, even if they don't plan to sell anytime soon, they may feel less wealthy in general and therefore spend less. But until the last four years, there had never been a sustained decline in home prices, so there's no historical precedent for assessing the impact of this condition either. And also no formula for a government policy that might help fix it. Besides, the government has its own budget issues to deal with at the moment.

A final indication of the disrupted housing sector is the vacancy rate in homes that are usually owned rather than rented. In the 20 years before late 2005, that measure of empty houses had averaged 1.6% and had never been more than 2.0%. But it reached 2.9% in 2008 and has since come back only to 2.5%. The reduction in vacant housing is welcome, but at that level we're still in largely uncharted waters by historical standards.

Some Negatives At Least Less Negative Now
Are there factors in the economy that look more positive? Or are the pessimists right that another recession might be coming? We saw a sharp drop in the stock market right after the debt ceiling/credit downgrade debacle in early August, but that drop seems to have been arrested, and several recent days have seen strong gains in stock prices. Gasoline prices got to almost $4.00 nationwide during May, but they have retreated somewhat; Monday's national average was reported by the Energy Department at $3.63/gallon for regular. This frees up some of consumers' incomes for spending on other things. Their spending did go up fairly vigorously in July, according to Commerce Department data out just on Monday, with gains in a variety of goods and services. Europe is held back by its own debt crisis, but various other large countries, such as China, India and Brazil, continue strong growth and spreading purchasing power that is building a middle class among their populations. The deleterious effects of the March earthquake in Japan are fading.

None of these forces is concrete enough to ensure sustained growth in the U.S., but neither are they definitive constraints. We think growth here will continue, but with a frustrating sluggishness. The first indication will be this Friday's employment report for August, and it will feature impacts from the strike of 45,000 workers at Verizon. So if you see a low number of new jobs, or even a small drop, don't be dismayed at that alone. [The way these statistics are compiled, strikes don't have a direct effect on the unemployment rate. The rate could suffer from knock-on effects in other sectors, but the strike probably didn't last long enough for much of that to develop.] Good luck to all of us in the months ahead.
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Some of the housing discussion above is taken from a commentary we wrote for Haver.com, the website of Haver Analytics, Inc. Here's a link. http://www.haver.com/comment/comment.html?c=110826c.html There are interesting graphs there of more of these indicators, which help give these developments more perspective.
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Entirely separately, we note with interest and concern the resignation of Steve Jobs as CEO of Apple. You may know that Jobs has been ill for some time with pancreatic cancer, and that now appears to have gotten the best of him as leader of a major company. Under his leadership, Apple has introduced iEverything – seemingly – for communications. Even the likes of Barbara Crafton and other priests of our acquaintance are avid users of iPhone and iPad. We offer Mr. Jobs our moral support and indeed our prayers in coming months. May the company continue with such imaginative and fun products.

The U.S. Government Debt Downgrade

Readers of recent Ways of the World articles will not be surprised to see that we are most upset by credit-rating company Standard & Poor's downgrade of U.S. Government debt from AAA to AA+, which they announced Friday night. Regular readers will probably also know that it's not Standard & Poor's that we're upset with. We have watched with increasing dismay as our elected officials in Washington toyed around the edges with an agreement to rein in the size and scope of the federal government and restrain its borrowing. Their lack of cooperation in the Debt Ceiling negotiations brought the Government to within hours of running up against cash constraints that would have meant somebody wouldn't get paid on time, whether it was a bondholder or an employee or the recipient of federal grant moneys – or a soldier or a social security beneficiary.

The agreement that was finally hammered out yielded fuzzy terms that increase the Debt Ceiling enough to last until after next year's Presidential election and call for minimal spending cuts in the meantime. A bi-partisan select committee of Congress will convene between now and November to draft more substantive spending cuts and possibly some revenue enhancements. This plan, which authors said is meant to reduce the deficit by $2.1 trillion over the next ten years, was not enough for Standard & Poor's, which had stated previously that its rating would be based on a $4 trillion cut. When that did not result, S&P's Sovereign Rating Committee voted a cut of its own, from a AAA rating for U.S. Treasury debt to AA+. Some argue that S&P made a $2 trillion error in their calculations, and while this may be true, their decision is based on a number of factors within a broad picture, not just a set of far distant numerical projections.

What's Really Bi-Partisan? Our Criticism
Recriminations came fast during the weekend, and were followed by a 600-point plunge in the Dow Jones Industrial Average stock index during Monday's trading. Our own criticism extends to both political parties. Some Republicans seem not to have understood the basics of the Debt Ceiling issue at all; they seemed to think that a vote to take on more debt could be a decision independent of the condition of the federal budget. They didn't realize that the mere existence of a deficit of any size demanded an increase in the Debt Ceiling so the shortfall could be financed. They seemed to scoff at the notion of default, even though it was mere hours away by the time of the final votes. But some Democrats also voted against the final bill, apparently because it contains no mandated tax increases; their votes indicate that they were not really aware of the urgency either. A person who was aware and whom we admire in this regard is Gabrielle Giffords, who made her first appearance on the House Floor since her shooting, and quite publicly cast her vote in favor of the Debt Ceiling plan.

Further, the Administration didn't really help. The Treasury could have announced that, of course, if cash were constrained, it would pay bondholders first, thereby sustaining the debt covenant with lenders. But they did not and in fact refused to make public any list of priorities in the payments they would make in the event the legislation failed. The President himself only acceded to a plan as it was shaping up on the Sunday, just two days ahead of the deadline.

S&P Named Brinksmanship as a Major Ingredient
So there's much blame to go around. This "brinksmanship" had an explicit part in the Standard & Poor's decision. The plethora of argumentation that followed S&P's announcement only serves to make their point more pointedly. Democrats argue that spending cuts will hurt the economy, and Republicans argue that tax hikes will hurt the economy. And none of this addresses the fundamental questions of what the American people really want the priorities of government to be. Further, we've heard how important it is to extend expiring unemployment benefits and the reduced rate of payroll tax payments in order to help the economy along. But in the short-term, these act like spending increases and tax cuts in their impact on the deficit, hardly the direction any policy move should take in order to reduce said deficit.

The Economy Doesn't Know What It's Doing Either
With all of this negativity, it's little wonder the stock market dropped like a stone on Monday. The economy itself is sending off mixed signals. Some companies have maintained very good profit growth, but they seem to be squirreling away the resulting cash surplus, even in regular bank accounts, rather than investing in liquid financial market instruments, much less in new facilities or other kinds of expansion. The latest employment report was mildly better, with 117,000 new jobs in July, including 154,000 private-sector positions. But a decrease in the unemployment rate from 9.2% in June to 9.1% last month resulted from a decline in the number of people looking for work, so the baseline labor force shrank, hardly an expression of confidence from would-be workers.

One more note, and something a stock trader referred to in the middle of Monday afternoon's market debacle, following a public statement by the President about the debt downgrade. Mr. Obama mentioned again that taxpayers at the upper end of the income structure don't pay enough income tax. The need for them to pay their "fair share" has become a mantra for the Administration. It's hard to know what share is really fair. IRS data for 2008 (latest available) show that the top 10% of earners paid 69.9% of the total income tax collected that year. The bottom 50% of the income distribution paid just 2.7% of the income tax. Further, in the wake of the much maligned Bush tax cuts, the portion of total taxes paid by that top 10% rose from 65.7% in 2002 to the 69.9% in 2008, and the share paid by the lower 50% decreased from 3.5% to 2.7%. What would it mean to tax the rich more? They in fact pay a lot of the freight now.

What Does It All Mean?
We wish we could say more about where this will all go and what it might mean to you. Part of the problem is simply that it's August and many people in decision-making positions are on vacation, Congress included. The debt downgrade might be expected to raise interest rates on consumer credit, mortgages and the like, because of increased risk suggested by the new rating on the Government's debt. But in the midst of the stock market's drop, Treasury rates fell, showing that even with that rating, they are still the "safe haven" investment for many investors. Perhaps how it matters to you is that stock market plunge; as we watched one cable TV business network's coverage of the market Monday afternoon, traders they interviewed were ambivalent about whether the day's blowout would herald a quick rebound or whether it marked a major turn. Ah, stay tuned. The only thing constant is change.