Monday, July 26, 2010

Beating the Estimate Isn't Saying Much

Investors are reacting positively to today's report that new home sales in June were better than expected. However, better than expected isn't necessarily good. On a seasonally adjusted and annualized basis, June sales were 330,000 units. That's 20,000 better than the consensus estimate and 63,000 more than were sold in May. Yet it is 66,000 fewer units than a year ago. There is currently a 7.6 months supply of new homes on the market.

The tax credits, which expired in April, caused April sales to surge to 422,000 and May sales to plunge to 267,000. That's no surprise. The June figure is merely the market's attempt to get back to equilibrium. Unfortunately, the long-term trend is still down for both sales and prices. The median price for a new home fell to $213,400 in June from $216,400 in May. It was $214,700 a year ago. The large number of foreclosures on existing homes won't help support prices for new homes.

The housing market is still in a process of finding a bottom. It may be close to getting there. If you are in the market for a new house, it's probably not a bad time to buy--depending on where it is located and how long you are planning to live in it. However, the longer-term health of the housing market depends on the health of the employment market. As long as large numbers of people who want jobs can't find jobs, housing prices and sales were remain depressed.

Tuesday, July 20, 2010

Housing Starts Fall

As I explain in a forthcoming column in Forbes magazine, the poor housing market is a major reason why I have remained skeptical about an economic recovery. Today's report on housing starts reinforces my view.

Housing starts in June fell to a seasonally adjusted annual rate of 549,000, 5% less than a month ago and almost 6% less than a year ago. The number was also significantly below the consensus estimate. Of course, much of the blame for the shortfall goes to the expiration of government tax credits. That should not surprise anyone.

Housing foreclosures and inventories are also on the rise. Foreclosures are closely related to the employment market. Despite the recent decline in the unemployment rate to 9.5%, there is little evidence of private sector job gains. Most of the employment growth is in the public sector. Although state and local governments have reduced payrolls, the federal government has more than made up for those job losses.

One bright sign is the financial services sector in New York City. Some firms, including Goldman Sachs, are finally hiring again. While this could be a turning point, it is still too early to be certain.

Thursday, July 08, 2010

Let's Listen to Arthur Laffer

Arthur Laffer is a conservative economist who is frequently pilloried by the left. He is best-known for popularizing the "Laffer Curve," a graphical depiction of the relationship between tax revenues and tax rates. The curve shows how tax revenues rise as tax rates rise, but only up to a certain point. Once tax rates surpass a critical level, tax revenues actually fall. In other words, when tax rates are already high (as they are now), the government can generate more tax revenues only by reducing tax rates. Many people find this obviously logical conclusion extremely counterintuitive.

In today's Wall Street Journal, Laffer takes on employment and makes a cogent argument as to why more generous unemployment benefits simply result in more unemployment. The facts clearly support his conclusion, yet those who point out facts are often accused of being cold hearted. There are 26 million Americans who are "officially" unemployed, marginally attached to the labor force, or working part-time for economic reasons. Many more are still working, but are extremely nervous about losing their jobs. One of my best friends just joined the ranks of the unemployed. He lost a job he held for 18 years. This guy is very smart and hard working. He would never consider milking the system to collect benefits while he sits at home. Yet the evidence is clear. The more generous unemployment benefits are, the longer people take to find jobs. It may appear to be cold hearted to limit benefits, but it is even more cold hearted to initiate policies that keep people out of work for longer periods of time.

Today, the Department of Labor announced that there were 454,000 initial jobless claims for the week ending July 3. Amazingly, this is considered good news because it is 21,000 fewer than the week before and 6,000 less than what economists expected. The private sector is still paring jobs. So are state and local governments. Yet the federal government keeps employing more and more Americans. These days, a job with the federal government is the only job that offers some security. However, as the government's role in the economy increases, so does the national debt.

Laffer's remedy is radical, but it would have no doubt worked. He says that instead of wasting all that money trying to stimulate the economy, we should have eliminated all taxes for 18 months. Imagine how many jobs would have been created if workers and employers didn't have to pay any taxes. Is it too late to implement this solution now? I say better late than never.

Thursday, July 01, 2010

Is a Double Dip Recession in the Cards?

The following is an edited version of Vahan Janjigian's commentary from the July issue of the Forbes Growth Investor:

When I was a kid, a double dip was a special treat. It meant you got two scoops of ice cream instead of one. When it comes to the economy, however, a double dip is no treat at all. It means you recover from a recession only to go into another one.

Readers of this page know I have been bearish on the economy for some time. In my view, things had gotten so bad there was no way they could quickly rebound. While I felt a rally off the March 2009 lows was justified, I also believed the market got way ahead of economic realities. After all, I saw no evidence of real demand for goods and services. Whatever demand I did see was artificially induced by increased amounts of government spending. However, with the national debt at 90% of GDP and a budget deficit of $1.4 trillion, the government cannot keep spending for long.

A few months ago, it was a faux pas to talk of a double dip recession. Today, it is de rigueur. A double dip is by no means a certainty, yet the odds are certainly growing in its favor. All that government spending was not particularly effective.

Look at housing. The latest figures on new home sales were abysmal. Why that would surprise any economist is beyond my comprehension. What happens when the government offers generous tax breaks to anyone who signs a contract to buy a house? We get plenty of signed contracts. And what happens when the tax breaks expire? Sales fall off a cliff. This is why April’s new home sales were strong and why May’s new home sales plunged. It also explains why pending sales of existing homes plunged in May. Furthermore, a signed contract does not guarantee a closing. Thanks to the mortgage-related financial crisis we are still struggling through, lenders have significantly tightened credit standards. Mortgage rates are at historic lows, yet many would be homebuyers cannot get approved to close the deal.

Housing is not the only market in distress. The latest ADP Employment Report showed a gain of only 13,000 nonfarm private jobs. That was 50,000 less than expected. Prepare yourselves for Friday when the Department of Labor releases its nonfarm payroll figures. The market is expecting a loss of 100,000 jobs. A number significantly worse than that will cause tremendous volatility in stock prices.

With the housing and employment markets so weak, how confident could consumers be? Not confident at all. After rising three months in a row, the Conference Board’s Consumer Confidence Index plunged in June. Only 8% of consumers surveyed think business conditions are good and only 4% believe jobs are plentiful. Consumers who lack confidence do not usually behave in a manner that spurs economic growth.

Finally, while I focus almost solely on stocks, I cannot help but notice the behavior of two non-equity assets. The yield on the 10-year Treasury note dipped well below 3%, yet gold prices are near $1,200 per ounce. Investors who believe these assets are reliable gauges of inflationary expectations are confused. The low bond yield signals no fear of inflation, but the high gold price signals the opposite. However, things really are different this time. Inflation has nothing to do with the prices of these assets. Increasingly risk averse investors now view Treasury bonds and gold as safe havens. They are selling risky assets such as stocks and bidding up the prices of safe assets. Stocks are getting cheaper, but I believe it is still too early to jump in with both feet.