Economics 05/05/2009: US' Green weeds

US data, some assert, points to a recovery around the corner. Well, it just might matter how far around the corner the recovery really is, doesn't it? A mile? Few hundred years? Or just at your feet - sitting cap-cap-in-hand and begging to be noticed.

Now, unlike many other economists, I can confess that I can't really tell. We, the economists, are, you see, rather far-sighted - neither good peripheral vision, nor short-sightedness afflict our ability to see into the future. We can tell you with some accuracy what the Euro/dollar exchange rate should be in 3-5 years ($1.10-1.05/Euro) but not what it might be tomorrow.

But there are facts that even we, the mighty economists cannot ignore. Here are some on those alleged 'green shoots'.

Fact 1: Home sales and prices: US new home sales were up in February +4.7% to a miserably low 337,000. At the peak in 2005 the number was 1.4mln. Do the maths.

March pending home sales index rose 3.2% compared with February and was up 1.1% y-o-y. The index covers sales contracts signed on existing homes. About time, given the historically low mortgage rates and an $8,000 tax credit for the first-time buyers. And it takes on average 6 weeks for this to feed through to the existent home sales figures. But housing starts are at 358,000 - 80.4% off their peak of 1,823,000 and the US still has some 12.2 months worth of housing stock on sale - more than 2.4 times the normal average.

Inventory-to-sales ratio for homes is now up at 1.43 (February figures) - relative to normal average of 1.25. In prices terms, median home is now selling for $200.9K - 20% below $251K.

Existing home sales have fallen 1/3 since the peak of September 2005 and the median price is down 28.7% since peak in July 2006. Again, February saw a rise ine xisting homes sales of 4.4% and the median price rose 2.4%, but inventories are still running at double the 5 month level of sales that is considered normal. Not surprisingly (see below under Fact 5), 45% of all home sales in February were foreclosed properties.

Since 2007, 0.9% of GDP was shaved off every quarter due to the 80% collapse in the new housing starts alone. Even if the US economy has hit the bottom in terms of new homes starts, this will only mean that housing starts from Q3 2009 (considering lags) will contribute 0% to GDP growth.


Fact 2: Consumption: In Q4 2008 personal consumption was down 3%. Then the Feds pumped $127bn into personal income via tax rebates (up 11% y-o-y), offsetting an $89bn cut in earnings in Q1 2009. This will slow down in Q2 2009 as the only personal income stimulus will be May Social Security 'bonus' of $250 per person. On the back of this, the engine of US economy, consumers is now showing signs of some revival - as the latest UofM index suggests. The process is aided by lower prices (deflation), lower gasoline costs and lower mortgage rates, although with most mortgages being fixed, the latter is of less help unless you are of the severely endangered species genus - the new buyer.

Demand for durable goods fell 0.8% in March in a seventh monthly decline since July 2008. New orders posted falls in virtually all sectors. Shipments were down 1.7%. On a positive note, inventories fell 1.1% and capital spending by businesses rose 1.5% posting a second consecutive increase, albeit on an abysmally depressing fall-off in January. Both, in my view, are not signs of strength, but of the moderation in the rate of industrial production slowdown – a ‘dead cat’ bounce. Since inventories are still running high, cutting these down to sales levels will mean erasing the loss in GDP growth of up to 2%. But the net contribution to GDP growth is going to be - you've guessed it - zero. And income is not necessarily going to translate into new spending - households first priority right now is deleveraging and the second priority is precautionary saving. What's left might be consumed, however little that might be...

But here is the bad news. All recessions in the modern history have on average saw personal income contracting 4-7%. So far, wages declined at 4% annual rate in Q1 2009, and payroll-tax receipts were down 8.2% in Q1 2009 y-o-y. So personal income growth will not be showing any 'green shoots' any time soon. Should we head for the upper range of the average 'normal' recession estimates, we are in for another acceleration in wages declines, to bring the total annual loss of income (and thus demand) to over $250bn in 2009. Good luck getting those Middle-Americans to consume much more than WalMart crisps and soda any time soon.


Fact 3: Growth in GDP won't yield growth in jobs: Unemployment is a lagging indicator in general, but consumers don't care that much what economists think - they need stability of income and security of job tenure before they start buying big ticket items again. Q2 2008 US had strong positive growth at +2.8% increase in GDP, while unemployment climbed up. In a traditional recession, this does not matter much as devaluation would normally drive investment cycle restart on the exports side, pulling in domestic consumers as well. Not this time around, folks. So we are down to looking at unemployment figures and unemployment sources.

Q1 2009 we saw US unemployment ranks swell by 2mln with unemployment rate moving to 8.5% (up from 7.6% in Q4 2008). US is now running on unemployment that is the highest (per unemployment rate) in over 25 years. And things are getting tougher by the day - March saw unemployment increases in 46 out of 50 states. California has 11.2% unemployment rate - record number for over 68 years. Even Jimmy 'Peanut' Carter wasn't able to wreck as much destruction during his disastrous Presidency.

Worse yet: underemployment (unemployed + part-time workers seeking full-time jobs + discouraged workers) is at 15.6%. Now, here is a tricky thing - underemployment is a leading indicator - temporary employment (a component of the part-time numbers) leads unemployment by 6-10 months. So if we are not seeing temporary jobs gains yet, we won't see ordinary unemployment falling for another 2-3 quarters. And then it will take some time for the labour market to work through the pool of surplus labour before we can expect a pick up in wages. The pesky issue is: in March there were further losses of 71,700 temp jobs - an acceleration on February and well above the monthly average of 47,900 temp jobs lost since December 2007 when the temporary jobs numbers fell for the first time.

Industrial production is down 1.5% in March m-o-m and 12.8% y-o-y, capacity utilization down to 69.3% - record low since 1967. Now, with this excess capacity in place, Goldman Sachs research estimated that even if output gap grows from 7% in 2009 to 10% in 2010, while GDP grws at 4.75% pa, it will take the economy some 5 years to work off excess capacity. This, of course is a powerful drag on business investment, which is good news for software companies and IT solutions speceialists and bad news for investment goods producers.


Fact 4: Financial Services are still in trouble. Banks, especially regional ones, are popping like soap bubbles - the grand total of failed US regional banks now stands at 32 since January 1 and 57 since the beginning of this recession. The rate of closures is accelerating. Two weeks ago - 5 banks were shut down, last week - 4. Not many green shoots (other than weeds) out there, amongst the smaller financials.

Per all the hype about the recent banks' results, here is a good analysis: "Citigroup said it made $1.6 billion [profit]. One of the ways Citigroup achieved this gain was booking a profit of $2.7 billion on the decline in Citi's own debt. ...Under accounting rules, Citi was allowed to book a one-time gain equivalent to the decline in its bonds because, in theory, it could buy back its debt cheaply and save $2.7 billion over time. Of course, Citi didn't actually do that. Even though more consumer loans went bad in the first quarter, Citi reduced its loan loss reserve from $3.4 billion in the fourth quarter to $2.1 billion in the first quarter, thereby picking up another $1.3 billion of 'earnings'. And the recent change in mark to market accounting enabled Citi to book an additional $413 million in 'profit' on impaired assets. Without theses one-time adjustments, Citi's $1.6 billion in first quarter profit becomes a $2.8 billion loss." Hmm... If I were a bank, I bet I could print profits out thin air and on the back of taxpayers cash injections too.

And the fundamentals are getting weaker too: some 3.22% of consumer loans were delinquent (30+ days overdue) at December 2008 mark - the highest rate of delinquencies in almost 35 years - since February 1974. The late payment rate on dealers-supplied auto loans were at a record 3.53% in Q4 2008, up from 3.25% in Q3 2008, direct auto loans: up from 1.71% to 2.03%. Late payments on home equity credit lines - a record 1.46% up from 1.15%, direct home equity loans delinquencies were up to 3.03% from 2.63%. Credit cards delinquencies rose to 4.52% from 4.20% but remained only slightly above the 4.47% average over the last four years. So with newly minted 2mln unemployed in Q1 2009 - expect these numbers to keep on rising.

There is no point to reiterate the estimates (the latest being from the IMF) that show the US banking sector standing to lose $1.5-2.5 trillion due to writedowns. So far, only $1 trillion of these were taken.


Fact 5: Personal and Business bankruptcies are up and rising. Average personal bankruptcy filings were at 5,945 daily in March - 9% increase in m-o-m terms and 28% up y-o-y. 5.06% of prime mortgage holders have already missed one or more payments, sub-prime mortgage holders (1/3 of the total market) delinquencies are at 22%. Foreclosures are up 46% y-o-y in March and 17% in m-o-m terms. Moody's estimate that number of repossessed homes will rise to 2.1mln in 2009 from 1.7mln in 2008. But business bankruptices are rising even faster than consumers' - last year, 136 US plcs filed for bankruptcy, up 74% on 2007, according to law firm Jones Day in April. IntraLinks, a bankruptcy data analysis group, said in April it had seen a 180% jump in bankruptcy and reorganization deals for the three-month period ended February 15, 2009, compared to the same period last year. US consumers bankruptcy filings jumped 29% in February y-o-y to 98,344, according to the American Bankruptcy Institute. ABI expect 1.4 million consumer bankruptcies in 2009, "at least".

On the net, do tell me if you see some 'green' shoots out there. I would love to seed them.