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.
* * * * *
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.
* * * * *
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.