Signs of the Economic Apocalypse

From: Signs of the Times 11-1-05:

Gold closed at 475.20 dollars an ounce on Friday, up 1.4% from $468.80 the week before. The dollar closed at 0.8287 euros on Friday, down 1.0% from 0.8369 a week ago. The euro closed at 1.2066 dollars compared to $1.1950 at the end of the previous week. Gold in euros would be 393.83 an ounce, up 0.4% from 392.30. Oil closed at 61.22 dollars a barrel, up 1.0% from $60.63 at the previous Friday’s close. Oil in euros would be 50.74 euros a barrel, unchanged from a week earlier. The gold/oil ratio closed at 7.76, up 0.4% compared to 7.73 the week before. U.S. interest rates, represented by the yield on the ten-year U.S. Treasury note, closed at 4.57% on Friday, up 19 basis points from 4.38 the week before. In the U.S. stock market, the Dow closed at 10,402.77, up 1.8% from 10,215.22 at the previous Friday’s close. The NASDAQ closed at 2,089.88 up 0.4% from 2,082.21 the week before.

The rise in U.S. stocks was attributed to the increase in political stability that may have come from the fact that only Scooter Libby was indicted by Patrick Fitzgerald on Friday, keeping Bush insulated for the moment. Also, economic growth numbers were released on Friday, indicating an annualized growth rate of 3.8% in the third quarter of 2005, in spite of the natural disasters. According to George Ure, those growth numbers indicated inflation more than they did a healthy economy:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.8 percent in the third quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.3 percent.

The Bureau emphasized that the third-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The third- quarter "preliminary" estimates, based on more comprehensive data, will be released on November 30, 2005.

The major contributors to the increase in real GDP in the third quarter were personal consumption expenditures (PCE), and software, federal government spending, and residential fixed investment. The contributions of these components were partly offset by a negative contribution from private inventory investment.

…The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 4.0 percent in the third quarter, compared with an increase of 3.3 percent in the second. Excluding food and energy prices, the price index for gross domestic purchases increased 2.2 percent in the third quarter, compared with an increase of 2.1 percent in the second.

Real personal consumption expenditures increased 3.9 percent in the third quarter, compared with an increase of 3.4 percent in the second. Durable goods purchases increased 10.8 percent, compared with an increase of 7.9 percent. Nondurable goods purchases increased 2.6 percent, compared with an increase of 3.6 percent. Services expenditures increased 3.2 percent, compared with an increase of 2.3 percent.

…Real federal government consumption expenditures and gross investment increased 7.7 percent in the third quarter, compared with an increase of 2.4 percent in the second. National defense increased 10.2 percent, compared with an increase of 3.7 percent. Nondefense increased 2.6 percent, in contrast to a decrease of 0.2 percent. Real state and local government consumption expenditures and gross investment increased 0.7 percent, compared with an increase of 2.6 percent.

…Now, let's run through some of the important meanings … so you will see the problems.

· First the annual rate is going up 3.8% - which is sure as hell evidence not of
anything fine and wonderful (remember half a million people are on unemployment, not counting all those who have fallen off the back end of the count) but instead I think it's a sign of INFLATION!

· Point two, wild consumer spending, trying to keep software current, war and hurricane spending and a housing bubble is what is keeping the economy going.

· Point three: Price index up 4% in the quarter but then they turn around with happy talk about price index readings ex food and ex energy. Show me people who can live without food and energy and I'll read you a fairytale, too. Who dreams up this crap?

· Real estate bubble was up 6.2% in the third quarter.

· GOVERNMENT SPENDING TO KEEP THIS THING AFLOAT WAS UP 7.7%

· DEFENSE SPENDING WAS UP 10.2%

Here are two more warning signals: consumer confidence was down and the housing bubble has ended. First the latter:

Suddenly, area's housing market favors the buyers
Cooling of sales to crimp economy

By Robert Gavin, Globe Staff
October 28, 2005

Greater Boston's once-sizzling home sales have cooled so much this fall that realtors are reverting to a description not heard in a decade: ''Buyer's market."

From the South End to the South Shore to Cape Ann, the list of unsold properties is growing, and so are reductions in asking prices. Attractive houses in good locations with seemingly appropriate pricetags are getting scant interest. Real estate agents, who six months ago played host to streams of buyers, are now presiding over open houses that draw few if any lookers.

For the last two Sundays, John Ford, of Ford Realty Inc., held open houses at a two-bedroom South End condo on a strong residential block of Columbus Avenue with parking, patio, and hardly outrageous asking price of $570,000. Not a single person showed up. In Weymouth, a four-bedroom raised-ranch with a view of the Fore River, priced at $445,000, attracted just one couple in the first hour and 15 minutes of an open house last weekend, prompting realtor Bonnie Goodstein to exult, ''O yay!
Customers!"

In Jamaica Plain, even a $70,000 price cut -- to $399,000 -- hasn't generated much interest in a two-bedroom, bi-level condo in a 19th century mansion that has been on the market for about a month. Sunday, only four people, including two curious neighbors, came to an open house.

''My seller is willing" to consider a lower price, said the broker, Anne Connolly, ''but there's no buyers to deal with."

The fall slowdown not only represents a sea change for sellers, who for years have
enjoyed multiple offers and higher prices, but also indicates the region's bull housing market is at an end. Real estate agents say a long-predicted market correction appears underway as the gap between the price of housing and peoples' incomes -- now even wider than at peak of the 1980s housing boom -- has become too great to sustain the recent pace of sales and appreciation.

Certainly, few expect an '80s-style collapse, when home values plunged 25 percent or more.Today, the economy and lenders are far stronger, and mortgage rates, which topped 10 percent when the last boom went bust, are far lower -- currently about 6 percent. In the 1980s, overbuilding, unsound lending practices, and intense speculation by investors, along with higher interest rates, sparked a real-estate crash.

Still, real estate agents today increasingly are telling sellers to expect lower prices than comparable sellers received six months ago. Linda O'Koniewski, owner of Re/Max Heritage in Melrose, said her brokerage is still selling houses, but at prices
5-to-10 percent lower than what comparable homes sold for in spring.

''All trends point to a correction period," she said.

While this may be good news for buyers, a slowing housing market will add a drag to Massachusetts' already sluggish economy. Real estate has been one of the state's few bright spots, generating not only jobs when most other sectors declined, but also wealth, in the form of rapidly appreciating home equity.

Homeowners, by refinancing mortgages, can tap into equity gained through appreciation as a source of cash. In Massachusetts, cash taken from home equity rose to 14 percent of peoples' disposable income in 2004 from 4 percent in 2001, according to Economy.com, a West Chester, Pa. forecasting firm.

Real estate-related employment in Massachusetts has risen about 5 percent since 2001, compared to a decline of about 5 percent in overall employment.

''A weakening housing market will be a significant weight on economies that have benefited from the real estate boom," said Mark Zandi, Economy.com's chief economist. ''It means fewer jobs in sectors such as construction. It short circuits equity withdrawals that supported household spending on home improvements, restaurants and vacations."

Analysts said it likely will take until spring, the main home selling season, to gauge
the extent of the correction.

Maggie Tomkiewicz, president of the Massachusetts Association of Realtors, agreed that the market has cooled recently, but rather than a correction, it represents a return to normalcy. She doesn't expect prices to decline year-over-year.

''The market was overheated," she said. ''A seller now needs to be more realistic" in
pricing.

The realtors association reported this week that the number of Massachusetts home sales rose in September from a year ago. Median prices increased about 4 percent over the prior year but fell from August. That data, however, lags the market since it includes only sales that have closed. It can take two-to-three months from purchase-and-sale agreement to closing.

Data from listing services, which better capture current conditions, suggest a weaker market. In Boston, for example, the number of condominiums listed for sale is up 50 percent from a year ago, while the number of price cuts has more than doubled, according to Listing Information Service Inc., which tracks the Boston condo market.

Analysts say a number of factors are contributing to this weakness, including rising interest rates, slow job growth, and soaring energy costs. Widespread speculation that prices eventually could fall rapidly is exacerbating the slowdown. As these factors have depressed buying interest, they also may have pushed sellers, sensing that the market may be at the beginning of a decline, to put properties up for sale,
brokers said.

The result: more supply, less demand, and sellers searching for buyers. Last Sunday, Globe reporters visited about a dozen open houses in different Boston neighborhoods and suburban communities.

In Rockport, only four potential buyers visited a three-bedroomCape, on the market since July despite three price reductions to $369,000 from $384,000.

''People are being very choosy," said the broker, Michelle Allison.

With growing choices, buyer psychology has changed, brokers said. In recent years, buyers raced to make offers, convinced prices would only go higher, or even bid against each other, pushing prices up. Now, many are prepared to wait, believing that prices are coming down.

At an open house in Braintree last Sunday, Jeff Brown, a 30-year-old health care professional, said he and his wife, Julie, have a price in their head, and they plan to stick to it as they shop. Last spring, Brown added, they were outbid on five homes, all sold above asking price.

Recently, after viewing a home in Norwell, listed at $645,000, Brown was told as he walked out, ''We'll take $535,000."

Regarding consumer sentiment:

Consumer sentiment falls further

Fri Oct 28,10:03 AM ET

Consumer sentiment dropped in October, falling short of economists' expectations for only a slight decline, a report showed on Friday.

The University of Michigan's final October index of consumer sentiment fell to 74.2 from September's final reading of 76.9 and from a preliminary reading of 75.4 in early October, according to sources who saw the subscription-only report.

A Reuters poll had shown Wall Street economists were projecting a slight fall to 76.4.

The survey's expectations component nudged lower to 63.2 from 63.3 in late September and 62.4 in early October.

The index of current conditions fell sharply to 91.2 from 98.1 in September and 95.7 in the early part of this month.

Confidence measures are often used as a gauge of future spending patterns. Consumer spending makes up roughly two-thirds of overall U.S. economic activity, and is seen as an indication of strength or weakness in economic growth.

So far we have inflation up, confidence down, and housing starting to fall. Next comes falling wages:

Fastest Decline in Real Wages on Record
Inflation Up; Wages Down

By JARED BERNSTEIN
Employers' wage costs grew 2.3% over the past year, the slowest growth rate on record, according to today's report from the Bureau of Labor Statistics. Factoring in the recent energy-driven increase in inflation, the real wage is down 2.3%, also the largest real loss on record for this series that began in 1981.

With hourly wages falling in real terms, the only way working families can raise their incomes is by working more hours-certainly not the path to improving living standards that we would expect in an economy posting strong productivity gains.This 2.3% rate is a slight tick down from the 2.4%--the previous historical low--that prevailed for the last four quarters. Compensation-wages plus benefits-also grew more slowly in the third quarter of year, up 3.1% over the same quarter last year, the slowest yearly growth in years.

For the first time in this employers' costs report, the Bureau of Labor Statistics presented these values adjusted for inflation. Both wages and compensation are losing growth in real terms, down 2.3% and 1.5%, respectively, as slower nominal wage growth is colliding with faster inflation. In both cases, these are the largest yearly real losses on record.

This is a broad measure of earnings, including all civilian workers. It thus reveals
an ongoing, important imbalance in this economic expansion. Overall measures of economic performance, such as gross domestic product, continue to perform well. For example, real GDP grew by 3.8% in the third quarter, above expectations and an acceleration over the 3.3% GDP growth rate of last quarter.

Yet the wage and compensation results show that this growth is failing to show up in hourly earnings. This has two implications. First, the view that increasing labor costs are pushing up prices is clearly not supported by these data. There is no evidence of an over-heating labor market that needs to be cooled by Federal Reserve rate hikes. Second, the resulting stagnant hourly wages will make it hard for working families to truly get ahead.

Jared Bernstein is an economist at the Economic Policy Institute

Higher prices now are fueled by higher energy prices which can only by cooled in the short run by lower demand, which it seems is what the Federal Reserve Board will continue to push for with rising interest rates. Coming, however, at a time of already stagnant employment and wages, as well as record consumer debt driven by an aging housing bubble and we have a recipe for collapse. There will be no way to gently reduce demand in the U.S. economy, it will either keep rising or come crashing down rapidly.