Recession Denial

Bob Herbert has a op-ed column in the New York Times (http://www.nytimes.com/2007/11/10/opinion/10herbert.html?hp) which enunciates what I have been discussing in a number of recent posts. Namely, that the U. S. economy is headed for real trouble and no one seems to want to face the reality. Pretending a problem is not in fact happening does not make it go away. All of the "job growth" and other smoke trotted out by the Chimperator's minions do not change the facts. Here are some highlights:

If it looks like a recession and feels like a recession ...“Quite frankly,” said Senator Charles Schumer, peering over his glasses at the Fed chairman, Ben Bernanke, “I think we are at a moment of economic crisis, stemming from four key areas: falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices.”

While Mr. Bernanke and others are waiting for the official diagnosis (a decline in the gross domestic product for two successive quarters), the disease is spreading and has been spreading for some time. The evidence is all around us. Representative Elijah Cummings of Maryland told Mr. Bernanke that many members of Congress are holding forums in their districts “to help people who are coming to our doors, literally with tears in their eyes, and trying to figure out how they’re going to manage a foreclosure that’s right around the corner.”

The housing meltdown is getting the attention, but there’s so much more. Bankruptcies and homelessness are on the rise. The job market has been weak for years. The auto industry is in trouble. The cost of food, gasoline and home heating oil are soaring at a time when millions of Americans are managing to make it from one month to another solely by the grace of their credit cards.

The country has been in denial for years about the economic reality facing American families. That grim reality has been masked by the flimflammery of official statistics (job growth good, inflation low) and the muscular magic of the American way of debt: mortgages on top of mortgages, pyramiding student loans and an opiatelike addiction to credit cards at rates that used to get people locked up for loan-sharking.

And the most popular measure of inflation, the Consumer Price Index, does not include the cost of energy or food, “the two most significant aspects of the increased cost of living for the American people.”

The elite honchos in Washington and their courtiers in the news media are all but completely out of touch with the daily struggle of working families. Thirty-seven million Americans live in poverty and close to 60 million others are just a notch above the official poverty line. An illness, an auto accident, the loss of a job — almost anything can knock them off their rickety economic perch.

We hear over and over that consumer spending accounts for 70 percent of the gross domestic product, but we seldom hear about the frightening number of Americans who are trying desperately to maintain a working-class or middle-class style of life while descending into a sinkhole of debt.

Yet for the GOP, the most serious issues continue to remain illegal immigrants (many of whom do labor American workers refuse to do), gay marriage and employment non-discrimination, and trying to start another war in the Middle East based on "cooked" information. Why the Democrats aren't jumping on this situation much more is dumbfounding.

U. S. Economy Shows New Signs Of Stress

Not that I want to play the role of a Cassandra, but some of the continued negative economic news should not come as a surprise to anyone who seriously follows the news and keystone industries such as housing. The housing free fall cannot help but drag the rest of the economy down. Moreover, with many consumers either stressed under the weight of adjustable rate loans or fearful that housing values will fall and leave them with little or no equity (or even owing more than their home is worth), it should be a no brainer that consumer spending will slow. Moreover, if people are having trouble paying their mortgages, obviously they will let credit card and auto loan bills slide as they struggle to keep their homes. And so the downward spiral begins. I still do not believe that the current regime has any clue as to what is going on with normal people and their financial struggles. Today's Washington Post covers some of these issues (http://www.washingtonpost.com/wp-dyn/content/article/2007/10/24/AR2007102402570.html?hpid=moreheadlines). Here are some highlights:

Many of the nation's biggest companies have cut back their sales expectations in recent days and the financial system is showing signs of new stress, evidence that the U.S. economy is more threatened by the sharp downturn in housing than it appeared to be only a few weeks ago. The investment firm Merrill Lynch yesterday reported its first quarterly loss in six years and said the value of assets on its books had fallen $7.9 billion. The National Association of Realtors reported that the number of existing homes sold in September was the lowest in the eight years the data have been tracked.

"On the fundamental economics, there's a perception that things are getting worse," said Kenneth Kim, an economist at Stone & McCarthy Research Associates. "On the credit-market problems, people had started to think the worst was behind us. Now they think that's not necessarily the case."

The problems started last week in the banking sector. Citibank, Bank of America and Wachovia each reported disappointing earnings, mostly from losses on a variety of credit products. The banks indicated that their portfolios of home loans, credit card debt and some forms of corporate debt were worth less than was previously thought, and led to write-downs of $2.2 billion at Citigroup, $4 billion at Bank of America and $1.3 billion at Wachovia. Bank of America said last night that it would lay off 3,000 employees at its investment-banking division and reevaluate the unit's strategy.

Last week, the construction-equipment maker Caterpillar warned that the housing downturn was spreading to other parts of the economy, raising fears about the economy's strength and its ability to avert a recession. Capital One Financial of McLean, meanwhile, last week posted its first-ever quarterly loss and said it had an increasing number of delinquencies and defaults in both the credit card and auto finance sectors.

The National Association of Realtors reported that sales of existing single-family houses, townhouses, condominiums and co-ops declined 8 percent in September from August, to a seasonally adjusted rate of 5.04 million units. The pace is the lowest since the association began tracking such data in 1999. Sales were down 19.1 percent compared with September 2006.

"I can't see a light at the end of the tunnel for declining home sales," said Stuart G. Hoffman, chief economist for PNC Financial Services Group in Pittsburgh. "Before we hit bottom, which may not be until next spring or summer, [the market] is going to be down another 5 to 10 percent from where we are now." "Housing is a black hole, but it hasn't quite sucked in the energy of the rest of the economy," Hoffman said. "But my forecast is that when we close the books on this holiday season, this is not a holiday [retailers] are going to remember very fondly."

All in all, NOT a pretty picture or one that adds to one's sense of financial security. I know of people who have been trying to sell homes for up to a year while making double mortgage payments. Eventually, they will be tapped out.

Home Sales and Prices Fall Sharply

More grim news on the housing industry front as reported in the New York Times (http://www.nytimes.com/2007/09/28/business/28econ.html?_r=1&oref=slogin). Obviously, if the trend continues, more and more builders and homeowners who took out 100% loans and other risky loans will be under increased pressure and/or face bankruptcy. Here are a few story highlights:

The latest data gave a fuller picture of the distress in housing-related industries, where the subprime mortgage crisis has led to turmoil in the broader credit market and to increases in foreclosures. On Tuesday, the National Association of Realtors reported a 4.3 percent drop in August in sales of existing homes, and another large home builder, Lennar, recorded the largest quarterly loss in its history.

Last month’s drop-off in new-home sales was focused primarily in the South and the West, areas particularly hurt by subprime-lending problems. The seasonally adjusted pace of new-home sales is now down more than 21 percent from last year.

“If sales continue to fall, builders will continue to cut back on construction, which will be a direct drag to economic growth,” said Michelle Meyer, a Lehman Brothers economist who specializes in the housing industries. “Inventories remain elevated, home prices will fall as a result, and a decline in home prices will depress consumer spending.”

Analysts concurred, predicting that the disappointing data signified only the start of an unfolding decline in housing that could last several quarters. “Anybody that’s expecting a turnaround in housing anytime soon is going to be disappointed,” said Mike Schenk, a senior economist at the Credit Union National Association. “It’s going to be a long, slow process.”

Richard Moody, chief economist at Mission Residential, a real estate investment firm, predicted a jump in foreclosures that would add to inventory woes. “When you combine that with the tightening lending standard we’ve already seen,” he said, “and the tighter credit market conditions we’ve seen since August, it’s going to take that much longer to work all this off.”