If you think of economic analysis as a footrace between positive and negative news, the positives pulled ahead of the negatives last month. But that doesn’t seem to have altered the contest in the economic forecasting arena, where economists predicting that the fledgling recovery will stumble under the weight of high unemployment and weak home sales are running pretty much neck-and-neck with those who think the recovery has the “legs” to make it sustainable, if not robust.
There is no question that the good news list has lengthened, as mildly positive numbers have grown stronger and previously negative numbers have turned positive. A few examples:
- The index of leading economic indicators, gauging the outlook for the next three-to-six months, increased by 1.1 percent in December, building on a 1 percent gain the previous month and beating the consensus forecast for a 0.7 percent increase.
- Consumer spending and consumer confidence also increased, beating their consensus estimates for December and January, respectively. The Conference Board’s present conditions index reached its highest level since August and the future expectations gauge hits its highest level since October of 2007.
- Service industries expanded in January for the first time in three months. The Institute for Supply Management’s index of non-manufacturing businesses inched above 50 (to 50.5), below the consensus forecast, but the first time the index has passed the line signaling growth since May, 2008.
- The long-stagnant manufacturing sector is showing renewed signs of life. The Institute of Supply Management’s Factory Index rose to 58.4 in January, as new orders, production and manufacturing employment all increased. The ISM’s business barometer also increased to 61.5 ¾ its highest reading in four years, and durable goods orders (excluding transportation) increased by nearly 1 percent, blowing past predictions of a 0.5 percent decline.
- Business investment in equipment and software increased at an annualized rate of 13 percent in the fourth quarter, reflecting a level of confidence that, some analysts say will translate soon into renewed hiring. “The groundwork has been laid for a very powerful recovery in capital spending,” Joseph LaVorgner, chief U.S. economist for Deutsche Bank Securities, told Bloomberg News. “It won’t take much of as park to get companies to star spending and hiring,” he predicted.
A Misleading Indicator
The positive column got another huge boost, or seemed to, from the fourth quarter GDP report, which showed the economy increased at 5.7 percent annual pace ¾ the best performance since the third quarter of 2003. But many analysts cautioned that this reading may be less a leading than a misleading indicator of future growth. More than half the fourth quarter increase was attributable to the rebuilding of inventories ¾ a slim reed on which to hang recovery expectations, according to New York University economist Nouriel Roubini. The demand that depleted inventories, Roubini and other analyst have noted, was created by government stimulus programs that are going to disappear.
“The headline number will look large,” Roubini told reporters, “but when you dissect it, it’s very poor.” With unemployment likely to remain stuck in double-digits, Roubini said, “it’s going to feel like a recession even if technically we aren’t going to be in one.”
Employment, or the lack of it, clearly looms as a major near-term impediment to strong growth. Surprising just about everyone, the unemployment rate fell from 10 percent to 9.7 percent in January, but employers still slashed 20,000 jobs for the month – more than the 5,000 economists had predicted, and another indication that “hiring” has not yet returned to the ‘to-do’ list of most corporations. Even the improved unemployment rate doesn’t reflect the millions of workers who have given up on finding jobs are counted in that calculation. And it turns out that employment picture over the past couple of years has been even worse than we thought. The annual revision of U.S. payrolls, reported by the Labor Department, indicates that the economy has actually lost 8.4 million jobs, not 7 million, since the recession began.
The consensus among 57 economists surveyed by Bloomberg News is that the jobless rate won’t improve until the end of 2011 and the “improvement” will bring the rate down to only about 9 percent. The projections in the budget the Obama Administration just presented to Congress are equally dismal, anticipating that unemployment will be only slightly below 10 percent at year-end and still at close to 8 percent by the last quarter of 2012.
That grim forecast has led Lawrence Summers, head of the White Economic Council, to warn of a “human recession” that will persist even as the economy gains strength, “suggesting quite profound issues that will ultimately impact on politics and decisions that businesses make.”
While the economic positives now outnumber the negatives, the negatives continue to out-shout them, with employment making the most noise, followed closely by a dearth of credit for consumers and small businesses.
The Federal Reserve’s survey of senior loan officers found that fewer banks are tightening their credit standards, but it also found no indication that they are loosening the tighter standards they have adopted since the recession began. More discouraging, the Fed reported that the nation’s largest banks slashed their small business loan balances by another $1 billion in the last quarter -- the seventh consecutive decline.
Bankers report that demand for both business and consumer loan has plummeted, a contention that has triggered this chicken-and-egg question: Is lending activity declining because demand is slow or is demand falling because businesses and consumers assume they won’t be able to get loans and so don’t bother to apply? That debate continues.
Housing Setbacks
Housing market statistics, which have been intermittently positive, turned negative again in December, as existing home sales fell by 16.7 percent -- the largest monthly decline on record. Industry executives blamed the rush to qualify for the home buyer tax credit (which was to expire November 30) for the setback, which Lawrence Yun, chief economist for the National Association of Realtors (NAR) said was not as severe as he had anticipated.
Yun and other industry analysts are expecting the extension of the credit (buyers now have until April 30 to execute a purchase contract) to trigger an early and robust spring market.
Thanks to the tax credit and low interest rates, existing sales increased by nearly 5 percent in 2009 --the first year-over-year gain since 2005. A recent, albeit modest, increase in pending sales suggests that the upward trend will continue this year, according to Yun, who sees “an increase in buyer confidence [creating] some sustainable momentum.” How sustainable that momentum turns out to be will depend, he concedes, on the employment outlook. “Job creation is the key to a continue recovery in the second half of the year,” Yun said in a recent report.
The outlook is less encouraging for new home sales, which posted their weakest year on record in 2009, with a 23 percent year-over-year decline. That downward trend continued in December, when sales fell by 7.6 percent compared with the prior month, disappointing analysts, who had predicted a 4.2 percent increase.
Like the Realtors, builders attributed the December dip primarily to uncertainty about whether Congress would extend the tax credit. But even with that explanation, “this is not a very encouraging number,” Mike Larsons, a real estate analyst with Weiss Research, told reporters recently. Although home starts fell again in December, ending the year nearly 40 percent below the dismal 2008 level, permits rose by 11 percent, reaching their highest level in more than a year.
That indicator of future strength wasn’t enough to cheer home builders, however; the industry’s confidence index fell in January, with the gauge of current buyer interest slipping to a 10-month low.
“Factors beyond our control, including consumer concerns about job security and competition from foreclosed houses on the market” continue to slow buyer demand, Joe Robson, chairman of the National Association of Home Builders, said in a press statement.
Lingering Concerns
Those negative pressures aren’t going to disappear any time soon. Although the “raw inventory” -- the number of homes for sale--has declined to a near-record low, the sluggish sales pace has increased the number of months required to sell them, to 8.1 months for new homes and 7.2 months (up from 6.5 months in November) for existing dwellings.
The Standard & Poor’s/Case-Shiller home price index, which had generated several successive months of increasingly positive numbers, also disappointed in January. The price trend was still up, but the tiny (0.2 percent) gain for the month provided “no clear sign of a sustained, broad-based recovery,” David Blitzer, chairman of S&P’s index committee, told reporters.
Federal Reserve policy-makers apparently share that view. The statement the Federal Open Market Committee (FOMC) issued after its most recent meeting conspicuously omitted the observation the committee made three months ago -- that the housing market “has shown some signs of improvement.”
Even so, the FOMC statement was more upbeat than previous post-meeting communications. Using the “R” word (recovery) for the first time, the FOMC restated the Fed’s intention to begin withdrawing some of financial props it has been using to support the economy, including the $1.25 trillion program to purchase mortgage-backed securities that is credited with keeping mortgage interest rates low.
“That is as close an admission as we are likely to see that the FOMC thinks the recession is over and that the economy is on a self-sustaining recovery path,” Christopher Rupky, told Bloomberg News.
If the FOMC statement can be read as an expression of confidence about the economy generally and the housing market specifically, it is not universally shared. Many analysts view the housing market as especially vulnerable. “We’re just not convinced [the market] can stand on its own two feet,” Paul Daley, an economist with Capital Economics, told the Washington Post.
The market “is on life support,” Mark Zandi, chief economist for Moody’s Economy.com, agreed. Removing government assistance for housing too quickly, he told Bloomberg News, “could sink [the market] and take the economy down with it.”
