Real GDP growth of 0.7 percent in the first half of the year has virtually assured that the lagging employment indicator will be dented in the third quarter.
Palm Coast, FL – October 12, 2011 – As I write this, the traditional “end of summer” is upon us. Kids will be back in school, most people back from vacation, things can get “back to normal.” But the end of this summer has brought with it some unusual – and in some places disastrous – events: Hurricane Irene, flooding in New England, dangerous fires in the Southwest, an earthquake felt by much of the country east of the Mississippi.
Economic data at the end of the summer hasn’t been that encouraging either. Indeed, economic growth has been frustratingly disappointing. Real GDP growth of 0.7 percent in the first half of the year has virtually assured that the lagging employment indicator will be dented in the third quarter. The August jobs data released September 2 confirmed the expected sluggish job market conditions, but frankly it was worse than most anticipated. No net jobs were created in August. The big ZERO job gain is also was utterly demoralizing to the six million Americans who have been out of work for more than six months. Americans are known for their resourcefulness and resiliency and typically do find a job after being laid-off. In normal economic times, only about a million are out of work for more than six months; in bad times, about two million. Today’s six million is unprecedented.
Those who have jobs should feel a bit lucky in this context, but they are not happy either. The hourly wage declined by two cents in August to $19.47. While it’s true that in times of high unemployment wages grow only slowly, it is extremely rare for the hourly wage to actually fall. If we’re lucky, the wage decline will only last for a month or two. But any sustained drop in wages would also be quite an unprecedented event in modern history. From a year ago, the hourly earnings are still above water, growing 1.8 percent from August of 2010. But that is well below the 20-year average 3.3 percent annual wage increase and even further below the recent 12-month consumer price inflation (CPI) rate of 3.6 percent. In short, American workers are falling behind in their standard of living.
The combined frustration of the jobless and workers losing their spending power are reflected in plummeting consumer confidence. According to The Conference Board, the Consumer Confidence Index registered 44.5, the lowest reading in 50 years except for that period between the autumn 2008 to spring 2009 when there was massive hemorrhaging in the financial markets.
In the aftermath of a financial market crisis there is always a balance sheet readjustment by key players in the economy. Persistent high spending and low savings rates are generally not sustainable or healthy for the long-term economic health. History has shown that too much borrowing by anyone or any entity will lead to a financial disaster sooner or later. So some form of adjustment was needed.
Americans had socked away $250 billion annually in the 10 years prior to the onset of the financial crisis. The savings rate was a very low 2 to 3 percent of disposable income. From 2008, consumers started to become more careful about spending and the savings of everyone combined rose to nearly $600 billion annually.
The rise in the savings rate, however, has not impacted the necessity of buying food, clothing, utilities, and health care, the prices for all of which have hit new highs recently. Interestingly, even discretionary spending on recreation reached an all-time high. People are tightening their belts.
But higher prices for necessities combined with the increased savings rate have principally hit households’ two biggest purchase items: cars and homes. We’ve seen 11 to 12 million vehicles sales in each of the past three years – well below the 16 to 17 million that would be typical in normal economic times. And for those of us involved in the real estate industry, we know only too well that home sales are also off their highs. New and existing home sales hit 1.2 million and 7.1 million, respectively, in the 2005 bubble year. Comparable figures are currently 300,000 for new home sales and 5 million existing-home sales.
It is not only consumers who are watching their spending, but also businesses, banks, and state/local governments, all of which have also undergone some degree of this belt-tightening of either reducing debt or holding onto excess cash. Only the federal government has been moving in the opposite direction, with more spending from borrowed money.
The only good news related to such “deleveraging” is that the process could move in the reverse direction soon. Further deleveraging in the private sector may not be needed. Consumers have been saving and so some of that savings inevitably will show up as a downpayment for a home purchase. Companies will be pressured by shareholders to either invest in new equipment and plants or pay out higher dividends. The so-called Super Congressional Committee on debt reduction will assure federal borrowing will have to slow down (or automatic spending cuts will be triggered if its recommendations are rejected).
There is never a perfect straight line path in economics. Things move in cycles. Though foreclosure and short sales will be with us for at least two more years, the inflow of new inventory is easily being matched by outflow of absorption from home buyers. The overall inventory of homes available for sale has stopped growing for existing homes and is falling fast for new homes inventory. Consequently, home prices have begun to show signs of life. NAR median home prices have been bouncing up and down from month to month recently, an improvement of sorts from being consistently down. The repeat home price measurement of Case-Shiller has shown three straight months of increase. So despite the very sluggish economic and job market expansion, it may just be that the real estate sales and prices may have already reached their bottom – provided the economy and jobs do move forward, even at a very slow pace.
©National Association of Realtors® – reprinted with permission