Consumers On the Rebound

Popular Economics Weekly

Maybe it’s Spring? Consumers must be feeling better, since they are able to pay down their debt load, while spending more. Personal consumption and even pending real estate sales are up in May-June, while mortgage delinquencies continue to fall.

Mortgage delinquency rates peaked at 10.97 percent in December 2009, and have been falling steadily since, though foreclosures have not been declining. That’s because lenders are every so slowly working through their backlog of seriously delinquent mortgages—those more than 6 months in arrears. Both delinquencies and foreclosure levels are still far above the historical rates of 4 percent and 1 percent of all mortgages, respectively.

According to Lenders Processing Services (LPS), 7.96 percent of mortgages were delinquent in May, down slightly from 7.97 percent in April. LPS also reports that 4.11 percent of mortgages were in the foreclosure process, down from 4.14 percent in April. This gives a total of 12.07 percent that are delinquent or in foreclosure.

The Pending Home Sales Index put out by the National Association of Realtors, a forward-looking indicator based on contract signings, rose 8.2 percent to 88.8 in May and is 13.4 percent higher than in May 2010. The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

“Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace,” said NAR chief economist Lawrence Yun. “Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30 percent from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle.”

Consumers also continue to shop. Retail sales on a year-ago basis in May came in at 7.7 percent, compared to 7.3 percent the month before.  Excluding motor vehicles, sales increased a huge 8.2 percent, up from 6.8 percent a year ago in April.

When will businesses begin to spend their cash hoard? Only when so-called effective demand picks up, and that won’t happen until more debt is paid down. All household debt including mortgages still totals more than 100 percent of household assets. That is why demand is still relatively weak across the board, whether for durable goods (that last more than 3 years), or services. This means incomes have to substantially increase as well.

The good news is that increases in durable goods orders for the latest month were broad-based by industry.  Transportation led the way with a monthly 5.8 percent jump, following a 9.4 percent drop in April.  The swing in both months was largely nondefense aircraft (Boeing) which surged 36.5 percent in May after a 29.0 percent fall the month before.  Defense aircraft rebounded 5.5 percent after a 0.4 percent dip.  However, the auto industry appears to still be suffering from supply shortages.  Motor vehicles edged up only 0.6 percent, following a 5.3 percent fall in April.

Household net worth, the best measure of financial health, is also improving, as we said last week. It is at 370 percent, above the long term average of 350 percent, according to the Federal Reserve’s latest Flow of Funds report, while the personal savings rate is hovering around 5 percent, meaning that consumers are saving enough to continue to pay down their debts.

The Federal Reserve Bank of San Francisco also believes that corporations won’t open their pocketbooks until household debt levels decline further. “If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth,” said a recent SFFRB report. “The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.”

One would think higher corporate profits should mean corporations will eventually have to hire more workers, if they want to stimulate future demand for their products and services. Higher profits also mean a lower price-to-earnings ratio for stock values (earnings being the denominator in the P/E ratio), which has been hovering around 15:1 for the S&P 500 largest corporations of late. And a P/E ratio below 15:1 has historically boosted stock prices. So this new report should give a boost to stock prices for the rest of the year, but what will corporations do with the proceeds, other than using it for stock buybacks and cash bonuses to its executives? Creating more jobs is another story.

Harlan Green © 2011

What to do with Record Corporate Profits?

Popular Economics Weekly

U.S. corporations continue with record-breaking profits in Q1 2011. So what is wrong with the downturn in stocks, employment, and depressed consumer sentiments? Nothing, really, except corporations refuse to spend their profits. Of course, economies never recover in straight lines, consumers and government still have too much debt to ‘goose’ growth substantially after the greatest recession since the Great Depression, but corporations don’t seem to want to contribute to that growth just yet. That is why Bernanke and the Federal Reserve have to continue to hold down interest rates.

Consumers are still cash-strapped, as we said. That has resulted in the slowdown of GDP growth from 3.1 percent in Q4 2010 to 1.9 percent in the first quarter.

A good measure of consumer demand is Final Sales of Domestic purchasers, and consumer make up approximately 70 percent of domestic Final Sales. Final Sales had been rising 2-3 percent during the housing bubble, largely because consumers were using their home’s equity as a checkbook, but is now down to 0.4 percent annualized. It has never returned 2 percent since Q4 2007, the beginning of recession.

But corporate profits continue their surge in the first quarter; up an annualized 35.2 percent following a 12.6 percent drop the quarter before, and were up 7.8 percent on a year-on-year basis. This has resulted in something like a $1 trillion cash hoard held by the S&P 500 largest corporation, according to the latest data. In other words, corporations are not expanding their businesses.

When will businesses begin to spend their cash hoard? Only when so-called effective demand picks up, and that won’t happen until those debts are paid down. All household debt including mortgages still totals more than 100 percent of household assets. That is why demand is down across the board, whether for durable goods (that last more than 3 years), or services. This means incomes have to substantially increase as well.

The good news is that increases in durable goods orders for the latest month were broad-based by industry.  Transportation led the way with a monthly 5.8 percent jump, following a 9.4 percent drop in April.  The swing in both months was largely nondefense aircraft (Boeing) which surged 36.5 percent in May after a 29.0 percent fall the month before.  Defense aircraft rebounded 5.5 percent after a 0.4 percent dip.  However, the auto industry appears to still be suffering from supply shortages.  Motor vehicles edged up only 0.6 percent, following a 5.3 percent fall in April.

Household net worth, the best measure of financial health, is also improving. It is at 370 percent, above the long term average of 350 percent, according to the Federal Reserve’s latest Flow of Funds report, while the personal savings rate is hovering around 5 percent, meaning that consumers are saving enough to continue to pay down their debts, as we said last week.

The Federal Reserve Bank of San Francisco also believes that corporations won’t open their pocketbooks until household debt levels decline further. “If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth,” said a recent SFFRB report. “The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.”

One would think higher corporate profits should mean corporations will eventually have to hire more workers, if they want to stimulate a greater demand for their products and services. Higher profits also mean a lower price-to-earnings ratio for stock values (earnings being the denominator in the P/E ratio), which has been hovering around 15:1 for the S&P 500 largest corporations of late. And a P/E ratio below 15:1 has historically boosted stock prices. So let us hope this new report gives a boost to stock prices for the rest of the year.

Harlan Green © 2011

What Are the Future Jobs?

Popular Economics Weekly

Many well-paying American jobs are not disappearing—neither into computers, nor overseas, says the Bureau of Labor Statistics (BLS). And there will be a terrific need to repair and rebuild our aging infrastructure—to the tune of $2 trillion over the next 5 years if we want to bring it up to standard, according to the American Society of Civil Engineers.

Total employment is expected to increase by 10 percent from 2008 to 2018. However, the 15.3 million jobs expected to be added by 2018 will not be evenly distributed across major industry and occupational groups. Changes in consumer demand, improvements in technology, and many other factors will contribute to the continually changing employment structure of the U.S. economy.

Many will be service jobs—in health care, construction, and professional services followed by business, management and financial services. The shift in the U.S. economy away from goods-producing in favor of service-providing is expected to continue, says the BLS. Service-providing industries are anticipated to generate approximately 14.5 million new wage and salary jobs in the next 10 years. As with goods-producing industries, growth among service-providing industries will vary.

Construction. Employment in construction is expected to rise 19 percent. Demand for commercial construction and an increase in road, bridge, and tunnel construction will account for the bulk of job growth.

Manufacturing. Overall employment in this sector will decline by 9 percent as productivity gains, automation, and international competition adversely affect employment in most manufacturing industries. Employment in household appliance manufacturing is expected to decline by 24 percent over the decade. Similarly, employment in machinery manufacturing, apparel manufacturing, and computer and electronic product manufacturing will decline as well. However, employment in a few manufacturing industries will increase. For example, employment in pharmaceutical and medicine manufacturing is expected to grow by 6 percent by 2018; however, this increase is expected to add only 17,600 new jobs.

It’s no surprise therefore that college degrees will be even more necessary for future employment. Bachelor degree holders and higher have just a 4 percent unemployment rate, those with some College or an Associate Degree hover around 8 percent unemployment, while High School grads or less educated are above 10 percent.

Occupations in the associate degree category are projected to grow the fastest, at about 19 percent. In addition, occupations in the master’s and first professional degree categories are anticipated to grow by about 18 percent each, and occupations in the bachelor’s and doctoral degree categories are expected to grow by about 17 percent each. However, occupations in the on-the-job training categories are expected to grow by 8 percent each.

Harlan Green © 2011

Too Much Debt = Recovery’s ‘Headwinds’

Financial FAQs

Headwinds are blowing that threaten to stall this economic recovery, say the pundits.  Really?  Those ‘headwinds’ are caused by rising inflation from higher gas and food prices, certainly, but that is really a symptom of how cash-strapped are consumers even 2 years after the end of the Great Recession. 

The latest signs of consumer health show that consumers are buying, but not enough to kick growth higher because they still have so much debt to pay down. And they won’t be able to make much of a dent in debt, unless their incomes rise faster.

The best income measure is the Personal Income and Expenditures report of the Commerce Dept. Personal income in April did post a 0.4 percent gain equaling the pace in March.  Importantly, the key wages & salaries component increased 0.4 percent, following a boost of 0.3 percent in March. (Wages and salaries make up some 80 percent of personal income; self-employed incomes and transfer payments the rest.) However, real disposable income (after taxes and inflation) in April was flat, matching the March pace but actually topping February’s 0.1 percent decline. Consumers have had no recent improvement in real spending power, in other words.

The situation is not being helped by the push in several states to eliminate collective bargaining of public employees. Collective bargaining means union bargaining and it is the only countervailing force to Big Business lobbying for more tax breaks—which is the corporations’ method of collective bargaining—when corporations have record profits. Corporations have always been able to bargain with their dollars, that is to say, whereas most employees can’t bargain for their wages & salaries unless they belong to unions.

The fact that there is mild inflation is actually a good thing. It means demand is increasing and not stagnant, even with personal incomes barely keeping up with the inflation. In fact with gas prices taken out, the Consumer Price Index is up just 1.5 percent in a year.

Consumers have been spending, as we said, but not with their credit cards. Outstanding credit gains are narrowly confined to non-revolving credit which rose $7.2 billion in the month for an eighth straight gain. The dominant factor in this category is vehicle sales which were strong through April but fell significantly in May. However, the decline in motor vehicle sales is largely attributed to shortages of vehicles dependent on parts from Japan.  The shortages are expected to alleviate soon with sales reviving.

But revolving credit, dominated by credit cards, fell $0.9 billion in April. March's data show revolving credit as unchanged which, unfortunately, is the second best reading since the financial collapse in 2008.  Consumers are still focusing on paying down credit card debt while banks are still writing off bad debt though not as rapidly as they did during the recent recession.

Consequently there is little pressure on employers to raise wages with so many still out of work. Since the start of the U.S. recession in December 2007, though, household debt leverage has declined. It stood at about 130 percent of disposable income in 2009. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. And future growth is itself dependent on policies that increase personal incomes and wages & salaries.

Harlan Green © 2011

It’s Basic Economics, Stupid!

Popular Economics Weekly

What was the reason for Fed Chairman Bernanke’s almost pathetic plea to understand real world economics, in his latest speech at the Atlanta IMF Conference? He said in essence that the Fed is caught between worries about inflation and an economy that is sputtering along. But in fact he was really calling for help!—that he needed help from Obama and Congress to keep economic growth going, because there is still a great danger of deflation than inflation.

If politicians want to obsess over the possibility of future inflation, in other words, then let them tackle the longer term entitlement problems—like Medicare, or foreign wars. But instead they are doing all the wrong things, as are the Europeans. They keep advocating drastic austerity measures while cutting taxes, when that will only depress growth further and expand the deficit (via less tax revenues), not shrink it.

Economic growth has slowed at the moment. But much of this is because of geopolitical uncertainty—the Arab Spring, Mideast oil, the euro bailouts of Greece, Portugal and Ireland, and maybe even our own debt ceiling problem.

But the Federal Reserve’s Beige Book report says most of the U.S. is still growing, retail sales are getting better, consumers and homeowners are paying down debt, and service sector activity in general that provides up to 70 percent of our growth is expanding faster.

Then why the obsession with inflation when it is just gasoline prices that are boosting the CPI index at the moment? Without gas prices the CPI has risen just 1.2 percent in a year. It is the classic battle between creditors and debtors that heats up during recessions. Creditors hate any inflation, since it devalues existing debt. And right now creditors—bankers and other holders of debt on Wall Street—seem to control the agenda. That is why we are hearing cries of austerity and budget cutting--all deflationary measures. Such policies drive down prices, all right, into deflationary spirals such as caused the Great Depression if done at the wrong time—like during this weak recovery.

The best weekly news was the jump in the Institute of Supply Management non-manufacturing (i.e., service-sector) index, which now makes up 70 percent of economic activity. The ISM reported broad month-to-month acceleration in the non-manufacturing economy. The report's composite headline index rose 1.8 points to 54.6 with strength centered where it should be, that is in new orders which rose more than four points to 56.8.

The ISM employment index also accelerated nicely, up 2.1 points to a 54.0 level that for this report is very strong. In other readings, deliveries lengthened, which is a sign of strength, and backlog orders rose at a healthy pace. Given that this report is based on a broad sampling of the nation's purchasers, says Econoday, it indicates that economic momentum is headed back up, albeit moderately.

One reason for what looks like a temporary slowdown, is that sales of combined North American-made vehicles and imports dropped to an annualized 11.8 million units from 13.2 million in April.  The North American component declined to 9.1 million from 10.1 million. 

The North American component includes Japanese brands assembled in the U.S. and parts shortages limited supply of many models significantly.  Lack of available Japanese brands pushed up related prices.  This may have convinced many car buyers to wait for the desired model to become available and/or for a lower price, according to analysts.

What is the help that Bernanke’s Fed needs? It can’t do all the heavy lifting, if more fiscal stimulus isn’t forthcoming. A good place to start is forgiving some of the $trillions in delinquent real estate debt incurred during the Great Recession. Real estate is hurting so much because it is estimated 25 percent of home loans are under water—i.e., have more loan than equity in their property. So the quickest way to bring down their debt load—which is holding back consumers spending—is to forgive some amount of the underwater mortgage principal, with some kind of loan modification.

The first quarter 2011 Federal Reserve so-called Flow of Funds report shows just how much is already “forgiven”, in some sense. Much of homeowners’ equity has been lost with so many foreclosures and short sales, of course. But homeowners are also paying down debt in record amounts.

The Fed estimated that the value of household real estate fell $339 billion in Q1 to $16.1 trillion in Q1 2011, from just under $16.5 trillion in Q4 2010. The value of household real estate has fallen $6.6 trillion from the peak - and is still falling in 2011.

In Q1 2011, household percent equity (of household real estate) declined to 38.1 percent as the value of real estate assets fell by $339 billion. A note by Calculated Risk says something less than one-third of households have no mortgage debt. So the approximately 50+ million households with mortgages have far less than 38.1 percent equity - and 10.9 million households have negative equity.

But banks are reluctant to modify loans unless urged by the White House, banking regulators, and/or Congress, even though it is also in their interest to take the delinquent mortgages off their books. And there has been no requirement that mortgage holders/servicers do so, even with the HAMP loan modification program.

Creditors—or rentiers in Europe—were also calling the tune at the beginning the Great Depression in the Hoover Administration. Roosevelt understood this, and instituted inflationary measures by increasing government spending, with regulations that controlled the banking speculation that caused the credit bubble—i.e., highly leveraged bank loans with no regard to risk. It took some inflation to get the economy growing again. In other words, it was the debtors turn to recover, which ultimately brought us out of the Great Depression.

The Roosevelt Administration actually refinanced more than 1 million homes under the Home Owners’ Loan Corporation from 1933-35, with bonds sold to the banks. It also bought many homes lost to foreclosure and rented them back, until they could be sold into the private market. Can we imagine what could be done today with that same political will? One million homeowners then would translate to at least 5 million today, when it is estimated there are no more than 8 million homes in various stages of delinquency. That is, if there is the political will to clean up the real estate mess.

Harlan Green © 2011

Growth Slowdown Ought To Be Temporary

Popular Economics Weekly

We may be in for a bout of disinflation, according to economist David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates Inc. But this is normal during recoveries, as some economies have grown too fast, while ours is still hobbled by too much debt and no consensus on how to create more jobs. “All the economic data is starting to roll over,” Rosenberg said in a Bloomberg Marketwatch interview. “We are positioned for the type of disinflationary slowdown that we’re going to be seeing over the next 12 months.”

What does he mean? (Disinflation isn’t deflation, since prices are still rising but at a slower rate.) There is a worldwide slowdown of growth in both the emerging countries and Europe, as their governments raise interest rates to either combat ballooning deficits or inflation. China’s economy is in fact overheating, while the Japanese and Australian economies had negative growth in the first quarter. And the euro’s problems are scaring the EU and Britain, where governments are also instituting austerity measures to slow spending and investment.

The official U.S. unemployment rate increased to 9.1 percent in May from 9.0 percent in April. This is the highest unemployment rate since December. Economists blamed the slowdown on higher gasoline prices and a slowdown in manufacturing caused by lack of parts from earthquake-wracked Japan.

But there is more to it than higher commodity prices and natural disasters. Another reason for the slowdown is that consumers continue to pay off debts—including mortgage debt—accumulated during the bubble years, rather than borrow. And that means less disposable income is available to spend.

So where is inflation these days? Overall inflation is falling (hence the disinflation) and that is harmful to economic growth. I.e., disinflation means companies can’t raise prices above the inflation level—which is basically the cost of doing business—so they cannot expand and hire more workers. We can see from a recent Paul Krugman Blog piece taken from the St. Louis Fed that both the retail CPI core and headline inflation numbers are still trending downward.

This means consumers have to spend more to reverse the disinflation, while companies and banks have to invest more of their some $3 trillion cash hoard. But neither will do so as long as the jobs picture remains dismal, and wages are depressed. For the record, demand theory tells us that it doesn’t matter who provides the jobs. Roosevelt’s New Deal Administration knew this when they employed so many in the WPA and CCC (Civilian Conservation Corps) work programs that built much of our modern infrastructure and National Parks.

We haven’t learned that lesson, as congressional conservatives and liberals battle over debt ceilings, instead of focusing on the ultimate solution to our debt problems—policies that create more jobs.

Harlan Green © 2011

Where are the Jobs?

Popular Economics Weekly

We know that economic growth has slowed in the first quarter—falling from 3.1 percent growth to 1.8 percent in the second estimate of Q1 GDP growth. But even with slower growth, all sectors are still hiring. And we know there are 3.1 million job openings per the Labor Department’s April JOLT Survey, vs. just 2 million in 2009.

So should we worry about the sharp drop in the Bureau of Labor Statistics’ May unemployment report that said just 54,000 nonfarm payroll jobs were created? Although economists are dismissing seasonal factors such as Tsunamis and tornados; motor vehicles lost 3,400 jobs from the Japanese shutdown of parts factories, 13,000 jobs were lost in ‘nondurable’ goods (retail products, mostly) which could also be attributed to weather factors, and governments shed another 28,000 jobs. State and local governments have now shed 446,000 jobs since September 2008 because of reduced tax revenues.

Calculated Risk gives us the reasons that job creation has slowed but is still growing.

• Initial weekly unemployment claims have averaged 425,500 per week in May, about the same as in December 2010 and January 2011. The BLS reported an average of just over 100 thousand payroll jobs added during those two months (although there were some weather issues in January).
• The ISM manufacturing index slowed sharply in May, however the Institute for Supply Management noted: "Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April." This suggests manufacturers were still expanding their payrolls in May (the regional manufacturing surveys also showed payroll expansion).

As if to counteract the weak jobs report and ISM manufacturing index, the May ISM service sector index just reported broad month-to-month acceleration in the non-manufacturing economy. The report's composite headline index rose nearly two points to 54.6 with strength centered where it should be, that is in new orders which rose more than four points to 56.8. Employment, in contrast to this morning's jobs report, accelerated nicely, up more than two points to a 54.0 level that for this report is very strong. In other readings, deliveries lengthened, which is a sign of strength, and backlog orders rose at a healthy pace.

So the jobs picture is still bad for those still looking for jobs, but wages and hours worked are rising. This means more hiring on the horizon. A few examples of regional reports from Calculated Risk: The Chicago PMI reported: "Breadth of EMPLOYMENT expansion softened but remained strong." The employment index decreased to a still strong 60.8 from 63.7 (above 50 is expansion). And the Philly Fed reported: "Firms’ responses continue to indicate overall improvement in the labor market despite weaker activity ..." and the Empire State survey showed "The index for number of employees inched up to 24.7, indicating that employment levels expanded over the month, and the average workweek index rose thirteen points to 23.7, a multi-year high." (above 0 is expansion).

WSJ Marketwatch also saw a silver lining in the job numbers. Job demand for different sorts of workers is not the same, so certain jobs and industries are more heavily weighted in some markets than others. Meanwhile, with all of the cuts to state and local governments, public-sector openings are lagging private-sector openings, as we said.

The Monster jobs online jobs index also weakened. But “In San Francisco, we have seen robust private-sector hiring, with IT certainly being huge,” said Monster Worldwide Spokesperson Matthew Henson, according to Marketwatch. “When you look at markets like Pittsburgh and Seattle, there’s a healthy mixture of blue-collar and white-collar jobs. Kansas City is seeing large demand for creative and marketing.”

The 10 ‘hottest’ job markets, according to Monster, are:

1. Washington

2. San Francisco

3. Baltimore

4. Minneapolis

5. Cleveland

6. Boston

7. Seattle

8. Orlando

9. Pittsburgh

10. Kansas City

Harlan Green © 2011

Housing Affordability Even Better!

The Mortgage Corner

Renters and young couples are shooting themselves in the foot if they continue to find ways to postpone buying a home. Housing affordability continues to new highs, as mortgage rates slip to a new post-WWII low, and housing prices recede back to 2000 levels. On top of that, mortgage delinquency rates are declining, which signals that inventories are declining as well.

Fannie Mae reported that the serious delinquency rate decreased to 4.27 percent in March, close to the long term historical average. This is down from 5.47 percent in March 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent. Freddie Mac reported that the serious delinquency rate decreased to 3.57 percent in April. (Note: Fannie reports a month behind Freddie). This is down from 4.06 percent in March 2010 and Freddie's serious delinquency rate also peaked in February 2010 at 4.20 percent.

The most recent National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) indicated that 74.6 percent of all new and existing homes sold in the first quarter of 2011 were affordable to families earning the national median income of $64,400. This eclipsed the previous high of 73.9 percent set during the fourth quarter of 2010 and marked the ninth consecutive quarter that the index has been above 70 percent. Until 2009, the HOI rarely topped 65 percent and never reached 70 percent.

Federal Reserve policies are mainly responsible for keeping mortgage rates so low, as well as investors looking for higher yields than given by Treasury Bonds. Mortgage rates are now at post-WWII historic lows. Conforming 30-yr fixed mortgages are priced at 4.375 percent with 0 points origination fee, for example. The so-called high-balance conforming limit to $729,750 is now 4.625 percent with 0 points, and even the 30-yr super jumbos to $3m are now at 5 percent, 0 points, signaling that ‘Private Label’ mortgages (i.e., not insured or guaranteed by government agencies) are again available to homeowners, albeit with AAA credit scores.

Housing prices seem to be most closely tied to employment. Calculated Risk shows that housing prices have peaked historically in three of the past four recessions at the same time that the employment rate peaked in the 4-5 percent range. Conversely, housing prices bottomed when unemployment began to fall from its high in each of those recessions. So we expect that to happen this year, as employment continues to improve.

The S&P Case-Shiller Home Price Index isn’t showing this improvement, mainly because it is a 3-month moving average through March, and employment has been expanding more robustly since then. The March figures showed just Washington D.C. and Seattle prices up of its 20 cities’ index. Also the home selling season is just beginning, with new home sales beginning to pick up—albeit from historic lows, as we said last week.

The economy’s growth rate has moderated as it has moved from recovery to expansion.  From a technical perspective, the recovery turned to expansion when output surpassed the previous peak which actually occurred in the third quarter of 2010 based on GDP.  Though housing is still in the doldrums, household formation should treble and top 1 million this year, as we said last week, as rising rents make it more affordable to buy. The consumer sector continues to advance and we believe will strengthen along with job gains—especially if oil prices have peaked.  It is really only consumers who will make this a sustainable recovery.

Harlan Green © 2011