A few items on the economy. Some people want to know where it is going. Here’s what we know about the economy, housing, mortgages, foreclosures, unemployment and health care…because that is a big part of making an economic comeback.
Economic Status and Projections
Starting with the overall economic condition, the Federal Reserve says that it looks to have a contraction, not an expansion, that is less severe in the second half of 2009 than was experienced in the first half. On the whole, while it shows marginal improvement it is not the kind of news we want to hear. Participants in the Federal Reserve’s decision-making said that improvements in the economy will be sluggish in the second quarter. We interpret their mentioning improvement only in 2010 as meaning there will be no improvement of any substance until sometime in 2010. So we’re in for six bad months, not as bad as the first six, but not fun. Here is some Fed-Speak to give you an idea. From June 24, 2009:
“With the strong adverse forces that have been acting on the economy likely to abate only slowly, participants generally expected the recovery to be gradual in 2010. Even though all participants had raised their near-term outlook for real GDP, in light of incoming data on labor markets, they increased their projections for the path of the unemployment rate from those published in April. Participants foresaw only a gradual improvement in labor market conditions in 2010 and 2011, leaving the unemployment rate at the end of 2011 well above the level they viewed as its longer-run sustainable rate.”
So what do we want to know? Will there be more jobs this year? Not many. Will companies be hiring? Not many. So what’s the problem? A lot of bad stuff. But even in bad news, there is some good news. The stimulus plan has already engaged the construction community and put money into education. Education spending is less visible but is different in that it will re-employ many people you will not see, because they will not be out on the roads or working on buildings. There is still about two-thirds of the stimulus plan that is being allocated and spent. Much of that is new industry and some of it long-term sustainable industry, such as conversions of old systems to new energy efficient systems and green systems. Less polluting systems for homes, autos and other systems that use energy for mobility or for work are being changed. That takes longer but some of it will show up later this year and could change the Fed forecast.
Mortgages and Foreclosures
Remember that the mortgage crisis kicked off the bad economy. First there was the mortgage collapse, that is, the fact that houses were worth a lot less than people were paying for them, and then the great sell off, which resulted in a massive number of houses for sale and too few buyers. Housing prices collapsed and that started a lot of problems for financial institutions who were speculating in housing. When we discovered that $400,000 houses were really $200,000 houses sitting on $200,000 of hot air, we had a huge economic contraction. It was like the power grid shutting down. In less than 18 months 7 million people became unemployed and it was heading much higher until the stimulus bill and the money in TARP and a few other things began to calm people down.
So let’s take a look just at foreclosures and see what will happen this year. In 2008, there were 3 million foreclosures, the largest number ever recorded. That was up from a figure of 800,000 the previous year, which could be an average, although they had been running lower prior to that. The bad news is that the projections from those watching the individual markets and homes in danger of foreclosure are for more foreclosures in 2009 than happened in 2008. Maybe as high as a million more, but more.
While foreclosures are concentrated in several principal states, like California with about 391,000 houses in foreclosure in the first six months of this year, the problem is serious enough to remain a serious drag on the economy. One of the problems is that many of the ARM foreclosures are about 40% “underwater.” In other words, many of the foreclosure notices are on properties that have a value that is only about 60% of what is owed. Further, in absolute dollar terms, some estimates say that one of twenty properties in foreclosure is worth at least $100,000 less than the mortgage due. But there is some good news.
New home sales in June were up 11% from the previous month, even though that number of new homes sold was still about 21% less than the same month last year. But up is always better than down, even if it is less than the previous year. June was better than May and if July is better than June, then one of these days we’ll be back to normal.
To discuss where unemployment is going, we need to see where it’s been. In January of 2008, unemployment stood at a pretty representational 4.9%. We’ve had 5% unemployment many times before and it is not what we would like but it is not uncommon. Then unemployment began to rise and by the end of the year it had grown by 2.6%. It was accelerating and before it could be slowed down, it dropped off another 1.9% by June 2009. That has leveled off a little at 9.5%, double what it was in late 2007. The crash came in late 2008 and when it did, jobs began to drop at a rate of 600,000 per month.
If you can imagine that a large manufacturing plant might have 5,000 jobs, and if you think, for example, that we lost 467,000 jobs in June 2009, you can see the extent of the problem. On the other hand, job losses were into the 600,000 range and dropped substantial in April and May, with May being something like 345,000. So the average over a quarter may indicate that we are slowing unemployment. In actual numbers, we had about 7 million unemployed at the beginning of 2008. We lost about 3.5 million in 2008, with a big percentage coming in the last three months of the year (700,000 in December alone) and then it continued into 2009, only slowing in April but still dropping. So we now have 14 million unemployed and it will probably be 15 million before the year is out. So the unemployment prospects are for more, but a gradually declining number of unemployed by the end of 2009.
Health Care Legislation
There is some good news in health care legislation. Despite Republican opposition and the $1.4 million per day being spent by health care interests to keep their average $14 million-per-year CEOs employed, a solid bill was passed out of the Health and Pensions committee in the Senate and two bills at least ready for vote in Congress. The Blue Dog Democrats seem to be coming on board with a public option as do more Senators, like Blanche Lincoln and Senator Jeff Bingaman from New Mexico. But some Senate offices have reported as high as 90% of calls coming from people NOT wanting a public option. When 76% of Americans say that they want a public option, this means that the Health Industry people are probably spending even more than $1.5 million a day. Eric Kantor, the diminutive and small-minded representative from some apparently backwoods part of Virginia has received $880,000 in campaign contributions since April from those who want to keep you from an affordable, accessible health care program.
So the health care fight is not over. It is just beginning. Now comes the fight on the floor of the House and Senate and then comes the real television campaign to pressure Senators and House members. If you want your health insurance to go down and if you or someone you care about could be laid off or might want to take a job or retire somewhere else, or might get a disease or have a debilitating accident, then you should be sending money, even a dollar helps, to the Governor Dean group or to MoveOn.org or to the President’s group Obama for America (barackobama.com). You can make a difference. He became President one five-dollar contribution at a time. This time, you can do something directly that will come right back to you in dollar savings.
If health care reform does not pass, whom do you think the health care companies are going to bill for all this money they have been spending on people like Eric Kantor? That’s right, your rates will go up, because the insurance companies will know that they have more power than you do, so….why not raise your rates? You can’t stop them. Don’t let this happen. Get involved this time.