Beaconomics: What should we know about the week's economic ups and downs?
This article first appeared in the St. Louis Beacon, Feb. 28, 2010 - As the third hard winter of the Great Recession turns to spring, how is the U.S. economy really doing? We put that question to St. Louis financial analyst Juli Niemann who described it this way: The hemorrhaging has stopped, but the patient still can't get out of bed.
That's Niemann's assessment of the big economic picture, which can often be difficult to see through all the little snapshots floating past us on any given day.
On Friday morning, for example, the Commerce Department reported that the nation's GDP -- gross domestic product -- rose at an annual rate of 5.9 percent from October through December 2009, the fastest expansion in six years.
So, how does that bit of good news square with Federal Reserve Chairman Ben Bernanke's acknowledgement to Congress on Wednesday that the economy's recovery rate is oh, so slow?
During any given week, the economic news can seem contradictory, such as this week's numbers on January foreclosures from the Mortgage Bankers Association, which some analysts saw as hopeful and others saw as more of the same. (Unlike the sales numbers for both new and existing homes which were down, no matter how you looked at them.)
And even as the Senate was approving a new jobs bill, the Gallup organization was reporting that the number of underemployed Americans is really 20 percent, more than double the government's official national jobless rate.
Niemann, an executive vice president with Smith, Moore and Co. in Clayton who has been in the business for 40 years, advises consumers to accept the constant barrage of economic news for what it is: just the latest installment in an ever-changing flow of information.
"From month to month, they announce unemployment and real estate numbers, for example. But these are numbers that are continuously revised, so to react to them in the short run is utter nonsense because it's preliminary information anyway," she said.
Taken as a whole, Niemann says, the economic recovery has a long way to go.
"At this point it's not getting any worse, but we are not in a recovery mode," she said.
The rise in the nation's gross domestic product -- while a good thing -- can largely be traced to the government's economic stimulus programs, including the "cash for clunkers" program and the $8,000 tax credit for first-time homebuyers, Niemann said.
"The good news is, we're not hemorrhaging. The bad news is that this recovery is only in sectors. There is no broad-based recovery in sight, but hopefully that will have a trickle-down effect," she said. "That's the cheery news I can tell you at this point."
Consumers are past the initial panic following the financial meltdown, she said.
"But I don't think we're quite to the hope level yet -- if you're into the cycle of market emotions," she added.
Niemann remains concerned about the amount of debt carried by the average American.
"The average household debt is still at 125 percent of the average income. In other words, we're still under water, and it's been this way for several years," she said. "We're starting to save more; we're paying down debt more. Which is a positive thing. But there's till too much debt out there. And who's got the debt? The banks do. In credit cards, in auto loans. They've got huge liabilities still out there yet to be recognized."
Niemann is a regular guest on American Public Media's "Marketplace" segments carried Tuesday mornings on National Public Radio. She says her specialty is "grasping the obvious" and she sees her role as explaining to listeners what's going on behind the numbers. We asked her to share her perspectives on several of the week's economic news stories.
1. On the Jobs Front
The latest news: A Gallup report painted a much darker picture than the official national unemployment rate, which in January unexpectedly declined to 9.7 percent from 10 percent.
Based on its new daily tracking metrics, Gallup determined that nearly 20 percent of the U.S. workforce -- about 30 million Americans -- was either unemployed or underemployed in January and struggling to stay afloat financially. Sixty percent of those workers said they had little hope of finding adequate employment in the next month.
Niemann's take: "They're talking about a jobless recovery, and the bottom line is that's no recovery.
"Many people are not in the official count because they have gone off the unemployment rolls. They've run out of benefits. You've got a lot of people who are working part time who want to work full time. You also have two years of high school and college kids not able to find jobs. And here we come -- it's spring again -- and it's going to be Round Three. The jobs just aren't out there.
"So you've got this very large, hidden unemployment situation. We have no idea how effective this new jobs bill will be, but we're to the point where you've got to do something. This is not a patient who is sitting up and taking nourishment. It can't survive on its own. It still needs a stimulus, and regardless of anyone's opinion of how it was administered, we would be in a severe depression were it not for the huge flood of fiscal and monetary stimulus money from the Treasury, from the government, from the Federal Reserve.
"State and local governments are in deep trouble because tax revenues are way down. They're going to have to start laying off this year. Last year, the first round of the stimulus went to state and local governments to keep them from laying off. That would have been a super plunge, and that's conveniently ignored by everyone who says the stimulus didn't work.
"Companies still don't need to hire because there is very limited demand. Where we are seeing demand is from the international markets. What are we shipping out? Machinery, which is a positive. Aircraft, another positive. And some services.
"But on the consumer goods side, it's basically still replacement. Consumers have an absolute death clutch on their pocketbooks; they're still not letting loose. At the higher income level, people are spending again. So the high-end retailers like Tiffanys are fine, but even big Wally [Walmart] is seeing a decline in sales because their customers are getting pinched further. And middle-income people are still fearful because of their jobs.
"There's no new job formation yet. We're still in net job loss. The only good news is when the drop isn't as big as it was last month. Until we have that turn, we are not looking at any possibility of recovery."
2. On the Foreclosure Front
The latest news: The Mortgage Bankers Association reported that the delinquency rate for single to four-unit residential properties was seasonally adjusted to 9.47 percent of all U.S. mortgages in the last quarter of 2009. That was a decline from 9.64 percent in the third quarter -- an indication, perhaps, that delinquencies are beginning to slow, the association said. The percentage of outstanding mortgages entering the foreclosure process in the fourth quarter was 1.2 percent, down from 1.42 percent in the third quarter.
But the Center for Responsible Lending, a nonprofit financial watchdog group, pointed out that the 9.47 percent rate compares to 7.88 percent in the fourth quarter of 2008 -- and accounts for nearly one in 10 borrowers. In addition, serious mortgage delinquencies -- those at least 90 days past due or in foreclosure -- remained at record levels in the fourth quarter of 2009. At the end of 2009, 4.58 percent of U.S. mortgages were in some phase of foreclosure, up from 4.47 percent in the third quarter and up from 3.3 percent at the end of 2008.
Niemann's take: "The banks are not rushing to deliver foreclosures on houses right now. The only time they start doing it is when housing prices stabilize or firm up a little bit. Then they hit with the next round of foreclosures to get them out on the streets.
"The banks still have an enormous inventory of houses in foreclosure proceedings, at some stage or another. This has not let up at all. What they're not doing is disclosing all of it. They have a wonderful portfolio of problems still coming down the pike. But they're trying to put it into the market when you get a little stabilization of prices.
"February is the disaster month because this is when all of the option mortgages reset -- the ones that were interest-only or 'pick your pay.' Do you want to pay a little interest? Want to pay a little principal? You don't want to pay? We'll, add it to your principal amount. Those mortgages are resetting this month, and most of those were done from about 2005 on, and they're all under water. They are inverted in value.
"That's the next round coming up, which is why housing is much worse than it looks.''
3. The Ups and Downs of Real Estate
The latest news: Sales of pre-owned homes fell by 7.2 percent in January, according to the National Association of Realtors, following a decline of 16.2 percent in December. The association attributed the steep decline to the rush of first-time homebuyers who wanted to take advantage of the $8,000 first-time homebuyer's tax credit. The credit expired in November but was later extended through April. Earlier in the week, the Commerce Department reported an 11 percent decline in the sale of new homes.
Niemann's take: "Even Robert Shiller [the Yale economist known for the Case-Shiller home price indices] says we probably still have another 5 to 10 percent decline in housing prices to come. Anything you're seeing in the short run -- housing firming up or stabilizing -- is strictly by region.
"San Francisico -- where everyone wants to live? -- of course, they've stabilized. In Las Vegas, they've taken entire developments and just bulldozed them. There's a lot of housing inventory to work off before you even start having any kind of meaningful recovery.
"One positive thing has been the $8,000 tax credit, and that has brought some qualified borrowers out. Banks are still looking very closely and going back to traditional lending practices: You only lend to those people who can pay you back. To qualified buyers, the credit has been a positive thing.
"Here's the kicker, though. At the end of March you're going to see the federal government stop doing what they have been doing to keeping interest rates extremely low on mortgages by basically buying paper from Fannie Mae and Freddie Mac. On top of that, the $8,000 tax credit runs out. At the end of March, I think we'll see the prices on houses going back down again."