What Spring?

from Peter Radford

It’s a couple of years since Ben Bernanke used the springtime “green shoots” description of the economy. Since then we have had a few good quarters of warming weather, but we never arrived at a fully fledged summer. We seem, to extend the saying, stuck in perpetual springtime.

The reason, I think, is clear. Average folks are not seeing much to cheer about. And since they form the bulk of the consuming population they are not providing the power to generate that burst sufficient to allow us to break out.

A couple of recent statistics get at the heart of the problem. 

House prices continue to drop. It is astonishing how long this decline has been going on. Yes, there have been a few false dawns along the way, but the trend remains resolutely downwards. Today’s Case-Shiller index merely confirms the gloomy news. Our housing malaise is a long way from being settled. Eighteen of the twenty cities in the index have seen declines in the last twelve months. The worst affected was Phoenix where the drop was 9.1%, whereas Boston saw the least decline at 0.6%. Only San Diego and Washington DC saw increases. Even then San Diego’s growth was minimal at 0.1%. The 3.1% drop in the overall index in January was worse than the 2.4% drop recorded in last December, and the outlook remains bleak

It is glaringly obvious that our housing problems are here for a while longer, and while they linger the shadow they cast is very long indeed. The real estate market has yet to end its adjustment back to a sustainable price level. The inventory of unsold homes is an illusion since it fails to account for a very large number of homes people would like to sell, but are unwilling to do so at what they consider to be  temporarily reduced prices. I am surprised that it is taking so long for sellers to realize that their homes are simply not worth what they would like to receive for them. This imbalance, this inability or unwillingness to grasp reality, is creating a burden in the market that is depressing activity and making matters worse. By elongating the period of adjustment we have allowed the adverse psychology to build to a point where the market clearing price is probably lower than it might have been had sellers been willing, or able, to withstand the earlier price declines. In other words had the original decline been sharp enough, and had people acted to dump homes in order to avoid further losses, we might well have arrived at a position from which the market could recover. Instead we are stuck in a long winded meandering decline that casts a pall over whatever recovery may be going on elsewhere.

This story has become so prolonged that there is no real news in it anymore. Yet is is still important to reflect on. As long as the housing market fades the way it is, households will remain reluctant to spend, and will be forced to save to offset the steady erosion of wealth caused by lost home values. The support of the vaunted wealth effect has become the erosion of an insidious poverty effect. Such is the inevitable way with real estate, an asset we should all view with as much skepticism as any other.

As if to support this thesis immediately, consumer confidence has taken a decided turn for the worse.

The Conference Board reports that its measure of consumer confidence dropped sharply in March, down to 63.4 from February’s 72.0. Prior to this decline the index had shown five months of steady increase, so March’s drop stands out as being a sudden reversal of trend. There is no real surprise in the factors driving the decline: food and gasoline prices have spiked up sharply lately; and wages are not keeping up. Add in the rotten employment market and people are realizing that the economy is just not as healthy as it ought to be. Yes, it has risen from the depths of the crisis, but, no, most of the benefit of that recovery has not flowed into average households. Indeed with disposable incomes under pressure from the spike in prices and with profits rather than wages scarfing up the gains from the recovery we are building a platform for possible decline in growth from its current rather poor level. Big businesses seem intent on shooting themselves in the foot by hoarding cash and not investing. And our government seems intent on aiding and abetting the decline by cutting government expenditure – which means jobs – before we have accelerated enough to withstand the blow. So our economy is not just leaderless, it is being badly led. The direction is the wrong one, and households are reacting by being more circumspect and pessimistic about their prospects.

In essence our leadership, business, political, and professional, has abandoned the task of encouraging economic growth and has entered a phase of self-destructive policy and strategy decision making. Presumably this is the course of least resistance.  For business it is always easier to cut costs that to generate new streams of revenues. It is always simpler to offshore activities to low cost production facilities than it is to innovate domestically. And it is more straightforward  to deploy attorneys and accountants to reduce tax burdens than it is to boost gross revenues.

As for the politicians. It is a much easier task to sell austerity and reduction, than it is to explain why we need to run larger deficits. After all voters understand the rhetoric of cutbacks more than the more convoluted argument in favor of spending.

So we are locked into decline. Or rather mediocrity. Voters accept that the economy is not going to provide for them. This acceptance is borne out of thirty years of experience with the stagnation associated with the relaxation of regulation and the massive growth in power of business. We have produced an economy that protects profit well. The cost has been the loss of opportunity and relative wealth of the very households who we now need to carry us along. That their confidence is dented or skittish, and that their belief in our leadership is skeptical to say the least, should come as no surprise. The combination of cynicism, anger, and abandonment embodied in our political discourse is dangerous. These are unhealthy times for democracy. But for capitalists the boom continues.

Good for them.