As a small business owner, I ongoingly do numerous assessments, for my own use, of projected business and related factors. This includes the status of the economy. The ultimate goal is to project and predict the rise or fall in business orders. This is not simply an exercise. It is vitally important to the well being of my business. I have decided share some of the data pertaining to the economy at large, my thought processes and general conclusions on this blog.
Economic statistics have been released as of September 30, the end of the 3rd quarter of calendar year 2008. Additional data is being released by various agencies and businesses related to the current banking and mortgage "crisis" which is morphing into a debt crisis, and pertaining to the U.S. economy. The popular media also issues articles in a more or less continuous stream. These are not always reliable, and as this was a presidential election year, I concluded that I must be more cautious than usual in my use of any data gleaned from the popular press.
See the end of this blog for comments added November 13 and later.
Summary
Based on the data available, it is my current opinion that on our present course, the economic "decline" could possibly reach its bottom as early as late 2009 or early in 2010. This is because of the continued deterioration of housing prices and resetting mortgages accompanied by rising foreclosures and the consequences of the stock market panic which as of October 30, 2008 had eliminated about $3 trillion in wealth. Retail, usually a buffer for jobs as in recent recessions, is also rapidly deteriorating. The International Monetary Fund today (Nov. 6, 2008) forecasts "only" a -0.7% contraction in the U.S. economic output in 2009. I consider a -1.0% contraction a possibility.
Positives
Positive factors include the conclusion of a torturous presidential election process, additional government stimulus, government intervention in failing mortgages, and falling energy prices, most notably oil. Retirees and others drawing social security benefits will receive a 5.8% increase in those benefits for 2009.
Other energy costs are also falling. Coal accounts for 92% of the electrical energy generated from combustible fuel in the U.S. Coal had risen 11% in the first 6 months of 2008, as compared to prices for all of 2007, but has recently moderated in price. Heating oil, which according to the EIA is used by 7% of U.S. households, was projected to rise in price by 23% this winter, but is now also expected to moderate and in New York state is currently about 1% above the price of one year ago.
With the IMF projection of possible simultaneous recessions in the U.S., Europe and Japan and also slowing growth in China, oil prices might stay at a low level longer than expected, perhaps until the middle of 2009. However, it is difficult to rely on that without additional consumptive data, specifics on OPEC production cuts, and details on the slowing Chinese economy . Recently, oil accounted for about two-thirds of the trade deficit. Falling oil prices and reduced U.S. demand should reduce the trade deficit. We'll know in November when data is released.
On a personal note, I use natural gas heating and I am on a "budget" plan with the local utility. Recently, my budget payment per month was cut in half! This was because in 2008 I achieved a sufficiently positive balance and the utility is projecting stable or falling prices. If that is indicative of what many others are experiencing, this provides a non-trivial injection into the pocket books of many consumers.
Negatives
Negative factors include overall negativity, falling confidence and pessimism. Foremost tangible factor is the astonishing deterioration in housing. Mortgages were projected to continue to reset for another five years.. However, the triggers built into these mortgages have accelerated the reset process, contributing to the current housing default rate. This should also accelerate the cleansing of these mortgages. The CMRI, an index of foreclosure risk, is predicted to continue to increase until December 2009 or January 2010. The consumer savings rate, while a positive, is also a negative as it removes government stimulus from the economy. Oil is currently falling in price, but will probably stabilize and could begin rising in Q2 of 2009. The losses sustained by owners of stocks of US corporations in 2008 are, I understand, greater than $5 trillion! If the stock market does not bottom out and stabilize, further panic selling may occur. This opens the door for further purchase of U.S. assets by foreign sovereign wealth funds. Consistently positive stock market data will contribute to improved optimism.
The government programs applied to date to address the credit and banking "crisis" have not been applied consistently. Congress would prefer to debate than to act. The Federal Reserve and Treasury departments are in a "rapid fire" reactionary state. Until the pace of the problems decelerates, this will probably continue and with it, more significant bad news will surface.
Consumer spending will continue to fall if for no other reason than the fact that with tightening credit, consumers will be forced to save first, and then spend. Even K-Mart is dusting off layaway programs for Christmas!
Unknowns
Factors which cannot be easily gauged include the full impact of current and future, unknown government stimulus packages. Stimulus to date has been "oblique", by which I mean it has been applied in a manner which does not always permit it to reach the economy at large. Nor can I gauge the status of the "unwinding" of debt, the full consequences of the restriction of credit to the consumer, and the savings rate by the consumer and consequences thereof. The negative savings rate became a positive one last quarter. At an annual rate, the BEA indicated that the consumer was saving about $297 billion. Link: Good News About Consumer Saving Also unknown, the current condition of the consumer as related to their optimism or pessimism. Pessimism that results in the saving of stimulus checks will further impede economic progress and short circuit the process. At present, we are as a society very pessimistic. I cannot gauge where the consumer will be in 6 months.
"Deleveraging" or the unwinding of debt, continues. This buzzword refers to homeowners, banks, companies and hedge funds, etc. selling assets so as to reduce outstanding debt. In some cases, this also meant selling currency as well as other assets to raise local cash. Apparently, many borrowings were in U.S. dollars or Japanese yen, due to low interest rates. The reversal of this borrowing has been used to explain why these two currencies soared. Unfortunately, this process is still going on, and it is said that hedge funds, as of October 10, were perhaps about 66% through their liquidation process.
The consumer has been, according to data, the driver in the U.S. economy. As the consumer withdraws, the economy contracts. So today we have a recession. How far will the consumer withdraw, and for how long?
If retail has a Christmas season as is currently predicted, and continues to cut its workforce, how long will it take for such businesses to begin the rehiring process?
It was predicted and there are statistics that support the notion that more people eligible for social security benefits would prefer to remain employed in the face of the uncertainty in the economy. This would provide some relief to government deficits. However, layoffs in sectors such as retail may force some of these into retirement. What will be the effect of increasing social securities recipients?
General Information
According to many "experts", the economy will not stabilize until housing has stabilized. If this is true, then the contraction could continue for another 18 months. That would yield a bottoming sometime after March 2010, rather than mid- 2009 as many "experts" are predicting. [Cautionary note: these same "experts" for the most part either missed or understated the depth and breadth of the current problem.]
The U.S. consumer who had been the driving force of the modest economic expansion since 2002, is now completely hobbled. The mild expansion of the last 6 years was fueled almost entirely by artificially inexpensive credit, which is no longer available to the consumer, coupled to a negative savings rate. Retirees, who if prudent, draw down their savings by 4% per year or less, are in a belt tightening situation as confidence and portfolios have been eroded, and yields on CDs are again falling. The losses in the stock and bond markets have reduced the value of these assets, and the amounts that retirees can safely withdraw by nearly 40% or in some cases, by more. The large increase in Social Security benefits (5.8%) will help, but will not restore lost savings or confidence.
I do have decreasing confidence in all predictions and anticipations which extend beyond six months into the future. That is because it is so difficult to determine exactly where the U.S. economy will be at that time. I don't think anyone can predict the effectiveness of U.S. policy and the bailout and "TARP" programs, the ultimate results of resetting loans on consumers and the economy at large. I do think that most economists and experts have understated the enormity of the current problems and as a consequence, have also overstated the rapidity by which the economy will recover. However, this is an incredible and resilient economy with fantastic companies and individuals. If we can prevent the politicians from doing what they do best, which is not very good, we have tremendous opportunities ahead. This is an opportunity to remake or at least, reconfigure the U.S. economy and break the various gridlocks in it. However, the U.S. Congress will continue to be a serious impediment to this.
I'll re-evaluate the economy on a quarterly basis. More frequent analysis is, I think, unwarranted, as the economy and the credit and housing fueled "crisis" go through their throes and gradually unwind. In truth, with the change to the Obama Presidency and so on, it may be two quarters, or spring 2009 before we can again gauge the depth and breadth of the economic quagmire, and also gauge the results of the various stimulus packages.
Other questions and issues
Other things to consider: Deficits for 2008 and 2009 may reach $1.5 trillion this year and $2.0 trillion next year. Depending upon how this money is spent, it may prevent a deep recession. If spent on infrastructure, it can make a lasting contribution. If not, it will simply be another of many debts passed to our children.
As a final note, it is my understanding that a lower trade deficit also means fewer dollars to buy U.S. debt. That debt as I have already stated, is mushrooming. So who will buy the debt? There are a few choices: the Federal Reserve can monetize it or can raise interest rates to attract capital from overseas. Or if U.S. citizens have sufficient savings, we can purchase it. What effect will possibly lower trade deficits (short term) and higher U.S. debt have on the economy?
Specific Information used in the above
1. Some efforts to reel in mortgage fraud are succeeding:
Efforts to eliminate mortgage fraud are having a beneficial affect. From "First American CoreLogic": On October 27, 2008, the company "announced that its Multi-Closing Alert Program has prevented more than $175 million in losses in its first 20 months for participating equity lenders who represent more than half of the equity lending market in the United States.
The Multi-Closing Alert Program helps lenders identify and stop multi-lien fraud, also known as “shotgun” fraud. Multi-lien fraud targets residential equity lending through fraudulent borrower schemes to apply for and close multiple loans on a single residential property within a short time period. The Multi-Closing Alert Program monitors all participating institution loan applications and pending closing activity and electronically notifies them of multiple activities occurring on a single residential property. According to data from First American CoreLogic, this type of fraud continues to be prevalent in several regions of the U.S., including California, New York, New Jersey and Florida". Link: Multi-Closing Alert Program Averts Fraud
2. Mortgage foreclosure risk is increasing:
From "First American CoreLogic": Core Mortgage Risk Monitor, Q3 2008 (July):
This map shows geographic areas, and does not represent the numbers involved. However, it has been estimated that 24% of all "underwater" or negative equity mortgages in the U.S. are in California.
You will note that large areas in California, Florida, Arizona, Nevada, and in the Northeast, most notably New Jersey, Massachusetts, Connecticut, Rhode Island, Virginia and lower New York state are classified as "High" or "Moderately High" foreclosure risk areas.
Of particular interest to me, as a resident near Chicago, Illinois, are the counties of Cook, DeKalb, DuPage, Grundy, Kane, Kendall, McHenry and Will, which are all "Moderately High" risk.
Risk is characterized by "home price declines, higher than average fraud and collateral risk, and a struggling local economy". The Core Mortgage Risk Index (CMRI) has risen "12% above a year ago and increased for eleven of the last twelve quarters. The CMRI -- which forecasts delinquency risk -- is currently 55% above the base period of Q1 2002, a period near the end of the last U.S. economic recession. Although significantly higher now than during the base period [Q1 2002], the CMRI is likely to continue rising nationally over the next 18 months". Link: Core Mortgage Risk Monitor Q3 2008
3. The global economy of developed countries, including the U.S., is contracting:The International Monetary Fund Economic Update was released Nov. 6, 2008. It is subtitled "Rapidly Weakening Prospects Call for New Policy Stimulus". Regarding prospects as it pertains to the U.S. "In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period....However, these forecasts are based on current policies. Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth". The IMF further states that ""The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions". Link: IMF World Economic Update
4. Housing in the U.S. continue to fall and more homeowners now have "Negative Equity":
In a Nov. 11 article, the New York Times, using data from First American CoreLogic and other sources, made the following statements: "7.6 million properties in the country were underwater as of Sept. 30, while another 2.1 million were in striking distance. That is nearly a quarter of all homes with mortgages". In the article, it stated that First American CoreLogic "evaluated 42 million residential properties with mortgages." This did not include certain states, for which limited data is available. These included "Maine, Mississippi, North Dakota, South Dakota, Vermont, West Virginia and Wyoming". The company then used computer models to calculate the current housing values using comparable sales. The article also stated that "More than 10 million homes do not have mortgages". Link: A Town Drowns in Debt as Home Values Plunge
Comments Added November 13 and Later
November 13:
The OECD issued a revised economic forecast for the U.S. "Economic activity is expected to fall by 0.9 percent in the US next year, by 0.5 percent in the Euro area and by 0.1 percent in Japan as OECD countries enter a protracted slowdown, according to latest projections. Watch the news conference to present GDP, inflation and unemployment forecasts for the three economies ahead of the G20 summit on the financial crisis on 15 November 2008". Link: OECD Economic Projections November 13, 2008
November 18:
Labor Department figures indicated a decrease in consumer prices by 1% in October. This is the largest one-month decrease ever recorded. Labor Department records began in 1947.
The Labor Department reported a large decrease in motor fuel (gasoline) prices as well as in other energy. Price declines were also reported in many other areas and "core consumer prices", which are prices excluding food and energy, also fell in October. The amount was 0.1%, which was the first decrease in core prices in about 26 years!
U.S. wholesale prices, which include gasoline, fell a record 2.8% in October. Wholesale gasoline prices decreased 24.9%.
The price of "finished energy goods" fell 12.8% in October, the largest decrease since 1986. Food prices fell 0.2%. The October 2008 inflation rate was 3.66%, a very sharp decline from September's 4.94%.
As reported at Bloomberg: "Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.6 percent increase in September....[however] Wal-Mart, the world's largest retailer, said yesterday it planned to reduce U.S. prices on Thanksgiving food and Christmas merchandise to lure customers during the holidays......Target, the second-largest U.S. discounter, said this week it plans to add grocery items and offer ``sharper'' discounts to draw shoppers who are shunning jewelry, clothing and home goods, which account for more than 40 percent of its revenue".
Link: Consumer Prices in U.S. Decline 1%, Most on Record
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