The law of gravity dictates that what goes up eventually comes down. The same principle applies generally to economics, but economic ups and downs tend to be both more extreme and less symmetrical than Newton’s encounter with his apple might suggest.
Economic principles can also turn traditional assumptions about the meaning of “up” and “down” on their head. While down almost always (although not invariably) denotes a negative trend, in the current environment, up (applied to foreclosure rates, delinquencies, and the unemployment rate, for example) is rarely a positive indicator. With these general thoughts in mind, it is worth considering what’s up, what’s down, and whether any items on these lists, if any, are likely to change their trajectories any time soon.
Heading down according to the most recent economic reports, we find:
- Consumer confidence, at a 28-year low; weekly earnings (down another 1.2 percent for non-supervisory workers in May);
- Job creation, measured by the Conference Board’s employment trends index, losing ground steadily since July and now at its lowest point since 2004;
- Employment forecasts (nearly one-third of the chief executive officers responding to a recent survey expect employment at their companies to decline in the next six months;
- Net household wealth – the 3 percent decline in the first quarter was the largest since 2002; home sales and home prices, still trending downward year-over-year in most major housing markets;
- Homeowner equity, at 46.2 percent in the fourth quarter of 2007, the lowest level on record since the end of World War II. An estimated 8.5 million homeowners, representing 16 percent of all owners with outstanding mortgages, have no equity or negative equity in their homes and Mark Zandi, chief economist of Moody’s Economy.com predicts that 25 percent of owners will fall into that category by this time next year.
What’s up? There are a few positives on this list, although how positive they are may depend on your perspective. CEO compensation, for one, is a positive only if you happen to be one of the highly paid executives whose salaries seem to bear no relation to the performance of the companies they head.
Less ambiguously up were retail sales, which increased a surprising 1 percent in May, bringing an unanticipated bit of good economic news attributed to the fiscal stimulus checks the Treasury Department has begun distributing to millions of consumers. But economists equated that boost to “a shot of caffeine” – dramatic but short-lived and, most agree, unlikely to be sustained in the second half of this year.
Also up, but not at all in a good sense – consumer prices, and not just energy costs, which have in- creased more than 50 percent over the past year. The cost of food has increased by 5 percent this year while the Consumer Price Index (CPI) overall increased by 0.6 percent in May, the largest one-month jump in the past year, pushing this barometer up 4.2 percent over the year-ago level and sparking speculation that the Federal Reserve may be forced to begin increasing interest rates next year, if not before.
The Federal Open Market Committee, (FOMC), the Fed’s policy-making arm, left rates unchanged at its June meeting, ending a string of seven interest rate reductions over the past nine months. But the statement announcing that decision indicated that inflation may be replacing recession risks as the agency’s primary concern. “Although downside risks to growth remain, they appear to have diminished somewhat,” the FOMC statement said, “while the upside risks to inflation and inflation expectations have increased.”
The list of upward movements suggesting negative trends doesn’t stop with interest rate predictions. Mortgage rates have also been inching upward much of this year, along with mortgage delinquencies and foreclosure rates, contributing in no small way to the downward pressure on home prices and home sales. Those trends aren’t likely to improve any time soon; the number of subprime adjustable rate loans slated to re-set is peaking this summer at around 7.61 percent of all ARMs outstanding, but the negative impact of those adjustments won’t be reflected in the foreclosure statistics until next year.
Meanwhile, another batch of loan problems is about to surface. Borrowers with option ARMs, allowing them to pick-a-payment plan, pay interest only or skip payments entirely, will have to begin catching up in a few months. And this “second wave” behind the subprime defaults “will complete the tsunami,” John Taylor, president of the National Community Reinvestment Coalition (NCRC), told the Washington Post.
The housing market forecast looks plenty stormy already. The closely-watched S&P Case-Shiller Index of home prices fell by 15.3 percent year-over-year in April, as prices declined in all 20 metropolitan areas the index tracks, effectively erasing the previous three years of appreciation gains. The rate of decline slowed a bit – to 1.4 percent compared with 2.3 percent in March —but economists were quick to snuff even that weak flicker of good news, pointing out that the April numbers were based on sales activity in February and March, when mortgage rates had declined a bit; the upward rate trend since then and tightening credit standards will likely put more downward pressure on sales and prices, many industry analysts believe. “Homebuyers looking for the floor should be wary of the roof caving in on them,” a recent article in Financial Times warned.
Existing home sales increased a tiny bit in April, beating the March tally by a slim 2 percent, but remaining 16 percent off the more significant year-over-year pace. The National Association of Realtor’s (NAR’s) index of pending home sales, reflecting purchases to come, increase to 88.2 in April, its highest reading since October, but that is still 12 percent below the April, 2007 mark. The inventory of homes for sale also declined slightly, but at a 10.8 month’s supply, this measure, too “clearly favors buyers,” Lawrence Yun, NAR’s chief economist, said in a press statement. It will take “several months” to make even a small dent in that surplus, Yun acknowledged.
The large proportion of sales involving foreclosed homes – representing 25 percent of total sales in some distressed markets – also won’t do much to improve the near-term outlook. First American Core-Logic estimates that banks held 600,000 homes in their REO portfolios in April compared with 254,000 in the same month last year.
The new home picture doesn’t look much brighter, with sales and new home starts at their lowest levels since 1991 and a 10.9 month’s backlog of unsold homes, despite aggressive cost-cutting and other builder concessions aimed at enticing buyers. Still, bargain-basement sales of foreclosed properties have begun to attract buyers in some particularly hard-hit markets, in what some analysts see as an indication that the market doesn’t have much further to fall. But if a housing recovery is in sight, it is likely to be “feeble” at best, Michelle Meyer, an economist at Lehman Brothers, said in a note to investors, noting that “many potential homeowners remain on the sidelines in anticipation of lower home prices and disheartened by the uncertain economic environment.”
Robert Toll, chief executive officer of Toll Brothers, one of the nation’s largest home builders, shares that restrained outlook. “It feels as though we are pretty much on the bottom,” he told American Banker recently. “But that doesn’t make you feel too good.”
