Popular Economics Weekly
We are beginning to see a many-shaped recovery. That is, some sectors show a ‘V’ shaped recovery, such as manufacturing. Employment is becoming a ‘U’ shape, while real estate could very well take the longest to recover, and so look like a ‘W’. This means it will be uneven, for starters, so that some sector areas of the country will recover before others.
Let’s start with manufacturing, which is being powered by our less expensive exports thanks to the Dollar’s lower foreign exchange value.
It had a record plunge during the recession, which probably ended last fall. It is too early to tell, but those expecting a "V" shaped recovery would expect industrial production to be tracking at or above the "severe recessions" line (since this was the worst recession since the Depression).
In fact, manufacturers’ new orders, a leading indicator, is up eight of the last nine months. It increased $3.7 billion or 1.0 percent to $370.4 billion, reported the U.S. Census Bureau. This followed a 1.0 percent November increase.
An employment recovery is already taking a ‘U’ shape, with the jobless rate dropping to 9.7 percent in January.
The month-to-month percentage change in employment is more useful, especially when compared with past recessions. It is a very shallow ‘U’ shape, but could still recover sooner than the 2001 jobless recovery, which took 47 months to return to pre-recession levels.
The shape of a real estate recovery is more uncertain. That is because the vacancy rate of unoccupied homes is still rising, meaning a huge overhang of unsold housing inventory. And maybe 20 percent of all homeowners have no equity left or are ‘underwater’ in their properties, which could lead to more defaults. This has basically stopped new home construction. So though defaults have leveled off at present, they could increase again, driving down both sales and home prices further.
The latest Case-Shiller Home Price Index shows that prices in most metropolitan areas are still trending downward, but at a slower rate. Only Dallas, Denver, San Francisco, and San Diego prices have turned positive over the past year.
In fact, most of the economy has been expanding for at least 6 months, but net revenues have either been hoarded as reserves against future losses, or used to pay down debt. Consumers’ outstanding debt has been shrinking for an unprecedented 11 months. Only when consumer credit begins to expand again will consumer spending return to historical levels.
Harlan Green © 2010
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Harlan. The theory that being “underwater” on a mortgage, i.e. the mortgage is worth more than the house on which it is based, is what led to the “Great Recession.” You pointed out in a previous article that in the actual experience foreclosures came from people losing jobs, not being “underwater.” Further, the models used by those valuing mortgage backed debt bonds were not even based on being “underwater” but simply on property prices. As soon as prices flattened they began to devalue the bonds far beyond what was merited, which led to the “credit freeze,” which in turn lowered consumption, then production and then raised unemployment. I would be cautious in talking about the effect of being “underwater” on the general economy. Funny, we in the property business used to call being “underwatrer” as being “upsidedown.”
Harlan. I left an important phrase out of my earlier comment. I should have said, “The theory that being underwater on a mortgage, i.e. the mortgage is worth more than the house on which it is based, caused defaults on mortgage payments and foreclosures, that led to the “Great Recession.”