No Predictions on the Global Recession – Just Data
”This worldwide crisis has few precedents, so history offers little in the way of guidance. Show me a person who knows for sure what we should do, and I’ll show you someone who needs medication.” http://www.bloomberg.com/apps/news?pid=20601039&sid=a_ac69DqFutQ&refer=columnist_hassett.
At this point, I will offer no predictions. But maybe some understanding can be gained by looking at how we got into this mess, and consider what is needed to get out of it.
Here is my sequenced list of key problems:
- Credit freeze
- Wealth loss
- Consumption reduction
- Investment reduction
- Global Recession
- Further Consumption, Investment reductions.
There is a real estate cycle. It usually goes up for 4 years and then down for a while. Nobody I know anticipated this would cause the global market for asset-backed securities to disappear. But it did. And that caused stock markets to crash. In my last article, estimated a stock market wealth loss of $29 trillion. In a comment, Chris Nagi said “My Bloomberg terminal has a handy function for world market capitalization that puts the global equity loss closer to $36 trillion since October 2007. It accounts for every stock on a public exchange.” Ouch!
And we need to add to that my estimated global real estate loss of $14 trillion. That means individuals globally have lost $50 trillion. Unprecedented! What will such a loss mean? People will feel poorer and they will cut back on unnecessary expenditures. Business will then reduce investments. Because of these twin expenditure reductions, unemployment will increase causing a further drop in income and further expenditure reductions.
Let us see if we can put some meat on this hypothesized disaster with US data (in one of my future articles, I will look at global data). The US Treasury regularly puts out a two page summary of data that is chilling – http://www.treas.gov/offices/economic-policy/macroecon/monthly_economic_data.pdf.
Let’s start with housing. Housing starts have fallen from 2 million in 2005 to an average annual rate of 466,000 in January. Sales of existing homes have fallen from 6.5 million in 2006 to an annual rate of 4.7 million in December 2008. The median sales price has fallen from $221,900 in 2006 to $175,400 in December 2008. And here is the kicker on that: The Mortgage Bankers Association says there are 7 million houses in foreclosure with another 2.6 million entering foreclosure. That means the housing inventory will continue to increase for some time putting more pressure on housing prices.
A side point about Obama’s plan to reduce foreclosures: in earlier days, banks held their own mortgages and kept in touch with their borrowers. Today, there is no direct contact with the borrowers: there are only collection agencies: all they know about the borrowers is whether they are paying on time. And now they are being asked to actually get in touch with the borrower and they are bitching: see Morgenson for a telling article on losing original loan documents: http://www.nytimes.com/2009/03/01/business/01gret.html?_r=1&scp=2&sq=&st=nyt.
In short, the housing industry is in a mess and it will be some time….
On the credit freeze, things are still problematic: the US government has effectively taken over AIG and Citi, and there are undoubtedly more big surprises coming.
On the stock market, John Mauldin presents a troubling statistic every so often – the declining earnings estimates on the S&P 500 for 2008: it fell from $92 in March 2007 to $29.57 in February 2009 for a P/E ratio of 29.4 on the latter date. See http://www.frontlinethoughts.com/article.asp?id=mwo020609.
Now let’s move to data on consumption and investment reductions. From the US Treasury sheets, car and truck sales down from a 17 million annual rate in 2005 to 9.1 annual rate in February 2009. Our auto companies are in trouble? It is going to be hard for any auto company to survive when demand has fallen by half.
More on consumption: Treasury reports new orders for consumer durables fell 22.9% in 2008 and another 4.5% in January 2009.
On investments, Treasury reports that orders for nondefense capital goods fell 31% in 2008 and another 3% in January.
And we have all heard the news on unemployment: 2.3 million jobs lost in the last half of 2008 and another 1.3 million in the first two months of 2009.
The only silver lining: the effects of Obama’s stimulus package have not yet been felt. But the bad news is, as I indicated in my last post, it will not be enough.
|U.S. ECONOMIC STATISTICS – MONTHLY DATA||(annual average)|
|Unemployment Rate (level)||5.5||5.1||4.6||4.6||5.8||7.6|
|Payroll Employment (monthly increase, thousands) (Avg)||Job Loss|
|Jul-Dec 08||monthly loss|
|Housing (thousand units, annual rate)||Jul-Dec ave.|
|Housing Starts 1,950 2,073 1,812 1,341 904 949 854 824 767 655 560 466||1950||2073||1812||1341||904||768||466|
|New Single-Family Homes Sold||1201||1279||1049||768||479||419||309|
|Auto and Light Truck Sales (million units, ann’l rate)||16.8||17||16.5||16.2||13.2||11.65||9.6||9.1|
|ISM Composite Index – Manufacturing||60.5||54.4||53.1||51.1||45.5||41.7||35.6||35.8|
|ISM Business Activity Index – Nonmanufacturing||62.4||60.1||58.0||56.0||47.4||44.9||44.2||40.2|
|Annual rate||previous month|
|New Orders for Durables (percent change)||6.40||14.80||0.50||2.60||-22.90||-3.65||-4.60||-4.50|
|New Orders – Nondefense capital (percent change)||8.40||29.60||-0.90||4.70||-31.00||-4.58||-3.00|