An Overview Of the Current US Economy

I am traveling today and may not get to today's market until tomorrow morning.

Yesterday the Federal Reserve released the Beige Book which provides an excellent overview of current economic conditions. So, let's dig in. I'm going to offset the Fed's information and italicize the words.

Despite some variation across Districts, employment levels appeared to be little changed, on balance, from recent months. Some weakening in the job market was reported in the New York, Atlanta, Chicago, St. Louis, and Minneapolis Districts. Cleveland reported flat employment levels, while Richmond indicated mixed trends. Boston and Kansas City indicated modest increases in employment, with some deceleration indicated in the latter. Firms in the Philadelphia, Atlanta, and Minneapolis Districts reported layoffs, reductions in work hours, or hiring freezes in response to current or expected slowing in economic activity.

Above is a graph of establishment job growth. Notice we're just at the beginning of problems in the labor market. In addition, job growth during this expansion has been the weakest of any post WWII expansion. This implies we won't see the same level of lay-offs as we've previously seen in the economy.

Above is a one year chart of employment growth. Notice we're only at the very beginning of a slowdown.

However, as the above your-over-year percentage change indicates, we've been experiencing some problems for some time.

And we're also seeing an uptick in the unemployment rate.

Consumer spending weakened in most, but not all, Districts since the last report. In particular, automobile sales were generally reported to be flat or declining. Vehicle sales were described as unchanged or falling in the Philadelphia, Cleveland, Atlanta, and Dallas Districts and were characterized as weak in the Richmond, Atlanta, Chicago, and San Francisco Districts. However, Kansas City reported that auto sales rebounded in March, though they remained lower than a year earlier. Non-auto retailers reported that sales were sluggish or declining in ten Districts. Elsewhere, Boston noted mixed sales trends, and New York reported a modest pickup since the last report. Chicago, San Francisco, and, to a lesser extent, Philadelphia noted relative strength in demand for luxury goods.

As a result of weak job growth (see above), we've see weak wage growth

Don't forget the high levels of household debt, which I think have now become enough of a burden to slow spending.

Debt service payments have been increasing for the last few years

All of this leads to declining spending

And somewhat stagnant retail sales for the last few years or so

With a declining year over year number

Manufacturing activity was varied, with some Districts reporting a slight increase in activity, some indicating weaker activity, and several noting that activity was mixed or had held steady. Chicago, Boston, and Richmond reported that activity was rising, but not substantially, while New York, Kansas City, Philadelphia and Dallas all reported that activity had weakened. St. Louis and Cleveland said that activity had held steady, while Atlanta, Minneapolis and San Francisco saw activity as mixed.

Remember, the main story here is the weaker dollar:

Which has lead to an increase in exports:

But the slumping domestic economy is still hurting manufacturing as shown by the following regional indexes:

Housing markets and home construction remained sluggish throughout most of the nation, though there were few signs of any quickening in the pace of deterioration. Ongoing weakness in housing markets, in general, was reported in almost all Districts. Sales activity was generally reported to be declining in the Boston, New York, Philadelphia, Atlanta, St. Louis, Minneapolis, Dallas and San Francisco Districts, while Kansas City and Chicago noted slack demand and excess inventories. On the other hand, the Cleveland District saw some pickup in activity, while Richmond and Atlanta reported some pockets of improvement; Boston, Atlanta, and Chicago cited some recent pickup in traffic or buyer inquiries. New residential construction was reported to have remained at depressed levels, and none of the Districts reported any pickup since the last report.

First, there is a ton of inventory on the market. Here is a chart of total existing inventory from Calculated Risk

Notice in the story above economists were predicting 750,000 to 1 million more homes will hit the market in the next year as a result of the increase in foreclosures. That means at minimum we'll see no meaningful drop in inventory over the next year.

And here is a chart from CSFB that shows we're nowhere near the end of foreclosures related to changing mortgage terms. In fact, we have a second wave to go through in about a year and a half:

At the same time, the US consumer is in debt up to his eyeballs and can't afford to talk out much more debt.

So -- there is little reason to think inventory will decrease in the coming year and there is little reason to think people will rush into the housing market because they are already under a tremendous amount of debt.

So -- what does that mean for prices? If inventory isn't decreasing and fewer people are able to take out a loan that means prices will have to drop. And considering how out-of-whack home prices are anyway, that shouldn't be much of a surprise:

Compare the 1990s with the 2000s (but also remember we were working on another bubble in the 1990s). Despite the fact that things were good in the 1990 we didn't see a huge increase in prices. However, we made up for lost time in the 2000s. Simply put, prices are going to drop before they move higher.

Business contacts across all Districts continued to report increases in input costs and output prices. In particular, price increases were consistently reported for food products, fuel and energy products, and many raw materials. More specifically, increases in the price of chemicals, metals, plastics and other petroleum-based products were commonly cited. Most manufacturers have or are planning to increase prices in response to rising input costs, while the response of service firms has been more mixed, in part due to differences in competitive pressures. On balance, input costs have risen more rapidly than output prices, putting pressure on margins for many firms. Most Districts reported little change in retail price inflation, though Richmond and San Francisco noted some moderation. Most business contacts reported that wages were unchanged or were increasing moderately in all Districts. Business contacts in the Atlanta, Chicago, Cleveland, Dallas, Philadelphia, and San Francisco Districts indicated that there has been some upward wage pressure for skilled labor in some sectors that continue to experience shortages.

For anyone who reads my blog on a regular basis, you should know that inflation is nowhere near under control. Here's one example and here's another example.

However, for those of you who have forgotten, here are the relevant year-over-year charts.

So -- the short version is the economy is slowing and inflation is rising. Not a good combination.

Charts from Econoday

Comments

[olephart]

Not to worry. The Market has gone up 4% this week. The oracles on CNBC have seen the future and it is recovery in the second half of the year. McCain's tax program will cut taxes by Trillions. Democrats in Congress are purposing Stimulus II, "Return of the Boondoggle". They're looking at bailing out the housing speculators, I mean homeowners who got caught when the music stopped. Freddie Mac will now buy billions in non conforming loans that the Banks are now stuck with. Wall Street has been bailed out. Everyone is getting something for nothing, money is gushing from thin air into the Economy. Whoopee, even the Dollar was predicted to turn around once everyone sees the Economy is on the mend. Jobs, incomes, inflation.....details that get in the way of perspective.

[dadw5boys]

YOU STILL DON'T GET IT DO YOU???

THE U.S. will soon be little more than a 3 rd world country full of people needing jobs and food.

The New World Order is here!

Bend over America here it comes.

[GreedyOldPsychopaths]

olephart's being facetious. Comprehending dialogue in the English language can be tricky, especially for the novice or foreigner.

[Veri]

Ah, The Peanut Gallery speaks. Housing speculators or Homeowners. The fact of the matter is, it really comes down to the bank loan officer. The bank loan officer is responsible for judging the merits of an applicant. The bank loan officer's duty is to deny loans, unsound loans. Without their approval, these "speculators" would not have gotten their loan.

Simple. Effective. Greed. The bank loan officers made irresponsible loans. These homeowners (speculators in your parlance) were also irresponsible. Still, without that loan officer, no "speculators". Blame the banks. That is where the breakdown in the system occurred. People are up to their eyeballs in debt. Actually, their debt is over their heads. You see an opportunity, no matter how unsound, you take a chance.

Really, one of the few avenues left in America to "afford" a decent living. Banks did not need to take this opportunity. I guess if you have a "golden parachute" regardless of a company's failure, CEOs do not have to worry about average Joe on the street.

The real question is, how long will we suffer under out new Aristocracy. The Republicans and Democrats (Demo-Republican Party) have fiscally mismanaged this country unto the brink of disaster. America is not No. 1 except in your dreams. America once was, but the corrupt flocked to where the power was. Government. And they own us. And you will dutifully re-elect them all back to where they can continue to screw us. Thanks.

[mmckinl]

Bondad understates the problems.

The reason? The figures he uses have been compiled using government stats that have been adulterated to understate unemployment and inflation ...

Papers from the Friedmanites have been implemented to alter these measures in favor of the oligarchy. One to look at is the Boskin-Greenspan paper that takes substitution of goods to a whole new level claiming that steak can be substituted by hamburger. Lowering inflation measured by the imposition of ridiculous methodology.

[Myst]

I know this reply is way too late, but I agree with you. More and more people feel inflation is worse than what's reported due to their difficulty in making ends meet and borrowing just to provide necessities. An article I read recently criticized the CPI for the same reason you did thought that true CPI was somewhere north of 7% which is far worse than the government reports.

[ReasonIsMyReligion]

Yup.

Does the official CPI reflect the degree to which medical bills -- after premiums and copays and reduced coverage -- and currently zooming college costs -- which much of the middle class will face -- make our stagnant wages and salaries LOSERS in today's economy?

Try asking your boss for a wage hike tied to medical bill hikes or college cost hikes, and see how long it takes him to spew coffee out of his nose.

[FogBelter]

Hale, I have a relative living in Vallejo California who shared something troubling with me. In his neighborhood there are two houses for sale. Both houses are three bedroom, two and a half bathes. Condition comparable, roughly same floor plan, within six blocks of each other. The asking price for one house is $409,000 the other ... $280,000. As you can probably guess the lower asking price is due to a Bank Sale.


I'm not sure if similar situations are occurring in other markets in the United States, but for sellers to be competing with cut rate bank prices for real estate can't beneficial for housing markets and the City Property Tax Base ... unless you are a buyer who can secure a mortgage.

[mamacat]

I went for a walk through a mall yesterday. People looked scared, and very little buying going on. Lots of gone-out-of-business shops in the mall, and the sales clerks looked gloomy.
One of the components of a downturn is fear, and I think we definitely have that.

[ReasonIsMyReligion]

You have to marvel that it took so LONG for the fear that has been belching forth from the fear factor(y) that is the White House to invade the economy.

[swift goat pet for truth]

Interesting analysis, as unsual. I always enjoy reading your articles, largely because of the graphs.
A picture truly is worth 1000 words.

However, can you do something about the SIZE of the pictures. Sometimes the words in them are not readable by old guys like me. Also, some of the graphs that are posted do not lable the axes adequately. And I am not familiar with some of the acroynms used.

Thanks lots.

[victorberry]

Whose measure of inflation is the Fed using for the "Real" in retail and food sales prices? If it's the bogus Department of Labor or Commerce inflation rate, then the flat or downtrend is actually worse than depicted.

Also, the retail and food sales prices should be presented in terms of per capita. If the population is growing, then again the picture would look a lot worse.

[Erdgeist]

Homes are the worst form of investment there is (about 4%). They only keep up with inflation. Housing 'downs' are twice and long as housing booms. Another matter, why the need for huge homes? Are some Americans lunatics? During the 1950s, when developer William Levitt created Levittowns for ordinary American families, a standard home was 750 square feet.

Right now the economy is on the brink of collapse due to Milton Friedman's neoliberalism. We need to radically "go back to the future" and reinstitute the American System of economics founded by Hamilton, Clay and others. With this system, nobody ever paid income taxes until 1913. All revenues to run this country were generated from tariffs on all imported goods. In today's number it might be around 300 to 800 billion dollars a year!

Why haven't you heard about this before: how we generated revenues for the Federal government other than by an income tax? I think we became a nation of idiots after 1913.

[swift goat pet for truth]

There are a lot worse investments out there than homes.
If the financial crisis is NOT over, there will be still more surprises for the banks.
And there are lots of people who would be willing to sell the CDO's and SVO's, if there are any takers.

I would not buy the retailers, either.

But I must say, this is the first time I have heard Milton Friedman's ideas assigned to any kind of liberalism, neo, or otherwise. Seeing what a huge failure it is, I am not surprised. A year ago it was the basis of conservative thought. Now its neo-LIBERALISM.

[GreedyOldPsychopaths]

Freidman was an ULTRA conservative in political orientation. His brand of economics was embraced by political conservatives. However, in the world of economics, Frediman considered himself classically liberal (liberalism: free to choose without government intervention, i.e. laissez-faire) or consequentialist libertarian. Freidman is credited for reviving Classic Liberalism along with Friedrich Hayek and Ludwig von Mises. The three will be properly reviled in future history as the greatest perpetrators of the most destructive and ruinous brand of economic policies ever wrought upon mankind.

[GreedyOldPsychopaths]

Erdgeist

The 16th amendment was part of a populist movement to end the "free pass" given to Robber Barons and the Nouveau Riche borne out of the Gilded Age. It was believed that the rich did not pay their "fair share" through sales and property taxes or tariffs. Reformers sought an equalizing tax that would apply only to the wealthiest 1% of the population. Thus, personal income tax was originally intended to equalize the burden of government taxation. However, the original intent was subsequently undone by FDR during WWII.

[Robert59]

We were talking about when is the next best time to buy houses as investment property. I opined it would be October or November of this year (90 days after the subprime resets crest and the houses enter foreclosure). I was totally wrong as it appears this is not the crest.

The tsunami will hit in 2010 to 2011 when the Alt As and Option Adjustable rate reset.

I thought this might be a short recession, but I'm mistaken. This will last until 2012 to 2013. We went from having 2 milllion houses on the market in '05 to over 4 million. We'll add another couple of million this fall and another couple of million in mid 2011. It will take the housing industry which accounts for 14 percent of the nation's GDP. Since finance contributes another 20 percent we are in for one hell of a slump.

I appreciate the education, but you just depressed the hell out of me.

Since we have 10 trillion in federal debt how are we going to buy our way out of this disaster? We're not. Wait and see but we'll be the next Mexico or Argentina when we devalue our currency.

More of the Bush legacy.

[swift goat pet for truth]

My opinion is that the American economy will not regain its historic strength until the middle class regains its access to a meaningful amount disposable income. Modern American, post WWII, was built on middle America's disposable income to buy the goods US manufacturers produced. Then came Reagan to re-distribute income to the wealthy. That took a while. In the meantime we had the tech boom, with its bubble, and the real estate boom, and bubble. During this time credit took the place of real disposable income. Well, the credit has dried up considerably.

US businesses need growth and profits. They can only squeeze their workers so much to increase the bottom line. The REAL growth comes from top line growth (sales). And that is not happening until the middle class gets more disposable income. And pays off its debt.

That is the Reagan Legacy.

[Veri]

The Reagan Legacy as implemented by Democrats and Republicans.

[joebaggadonuts]

I don't get a couple of things here Bondad. First, the charts of debt as a percent of GDP or of disposable income. How are those percentages figured? Second, you surmise that because we did not have high job growth on this most recent "expansion" that there may be smaller job losses than during a normal recessionary period. I don't know that that is an appropriate assumption although it may be.

[ReasonIsMyReligion]

We need a new term. "Stagflation" reflects domestic inflation, and economic stagnation, but doesn't reflect the sinking dollar against international currencies.

In addition to my aversion to associating the putz with a stag, for obvious reasons I propose...

"Bushflation."

[GreedyOldPsychopaths]

Nor does it reflect the purposeful manipulation by certain entities:

From WIpatriot on 2/21/08: "FINANCIFICATION."

From GOP on 2/21/08: "FINANCIFORNICATION" and for Latin lovers: "BENITUS INTERRUPTUS".

[ReasonIsMyReligion]

E Pluribus Oligarchum.

Caveat votera.

[ReasonIsMyReligion]

Caveat votera; e pluribus oligarchum.

[ReasonIsMyReligion]

Dear HuffPo,

I have now twice, make that a third time, tried to post a reply here. I note that the counter above says "0 pending", so here goes nuthin...

Not that I've ever taken a Latin class, but....

"Caveat votera" simply means "voter beware"

and

"e pluribus oligarchum" simply means "out of many, an oligarchy."

Give or take.

Sheeshus.

[outnow]

We are in stagflation. Inflation is rising. The dollar is dropping. The rate of growth is shrinking. This could be the entry to depression. Is see a credit card bubble, a continuing housing bubble, hedge fund debt, central banks on Wall Street stressed. It is a meltdown. The Roaring Nineties are over. A prolonged downturn - a depression - is possible because the safety nets are gone. The social safety nets - entitlements - are in taters. David Walker said that Medicare will run out in 2019 and Social Security funds reserves will be depleted in 2041. The "drug benefit" and the Iraq war are drawing available funds just as the baby boomers hit eligibility age.

The financial safety nets are in taters, too. They were set up to prevent financial manipulation and thwart debt-based pyramids. The 1920s was a period of wild speculation enriching a favored few but eventually wiping out almost all investors. The SEC is intentionally toothless. A second financial market which is unregulated has emerged. Off balance sheet risk and subprime mortgages, derivatives, credit default swaps, offshore money pools, and other hedge fund monkey business has grown exponentially. 500 - 700 trillion dollars worth of non-transparent collusive contrivances in the sha

[outnow]

"Shadow" banking system with starkly inadequate reserves. The security firms , too, have a "shadow' system; they evade regulation with "derivatives." The bailout of Bear Stearns was done behind closed doors. The extent of the interrelationships with other Wall Street houses, hedge funds, pension finds and commercial banks would have become public knowledge if the bankruptcy court was used.

There should be no "under the counter trading". Instead of greater transparency promised by Ben Bernanke, things are being done completely behind closed doors. "Counterparty discipline" means "trust us." The SEC had an ongoing investigation of the finances of Bear Stearns three years ago. Guess what? Attorneys from the investment houses were able to squelch the investigation from the SEC bu y pulling strings from the inside, according to former SEC investigators. At the time of this collapse, there will be no safety nets, just like in 1929.

Even if 50 trillion dollars of this financial paper (500 - 700 trillion in derivatives) is worthless - a mere 10% - that is a total disaster for the world's economic markets. The Fed is unable to do anything other than to prevent the dominoes from starting to fall. But the dominoes themselves are worthless, too. Debt-based assets are leveraged 31 to 1. Reserves are inadequate. Jobs are permanently gone.

[Veri]

Time to find a new economic system to replace the broken one? Where do we start?

[fairandjust]

It is not looking good for the average and below-average consumer. Job losses increasing, Jobs available pay less, food and fuel prices skyrocketing, consumer and health care related debt increasing.

So what can we do? Vote. Educate ourselves about candidates that will try to improve the economic conditions for average citizens.

Thanks for these economic related diaries. So when McCain says the economy is good - we know he hasn't seen that graph line where the jobs have taken a dive in the least few months.

[swift goat pet for truth]

Vote? Educate ourselves?

Judging by the debates on ABC, that is not happening anytime soon.

What is more important anyway: John Edwards' economic positions, or the price of his haircuts?
(Hint: the price of his haircuts. THANKS, MSM!!)

[Henry]

I think it's true that the American Farmer is doing quite well. (Think of the 80's when 20% of them were expunged) However, the auto workers of Michigan are not doing well and their periphery is doing badly in relative and absolute terms. The point is this: The sum total statistics do not mean anything personal. The train rolls on. When your neighbor loses his house, recession. When you lose your house depression. Now... how about pro sports? Any problem in their sector? Filthy Fat Cats? Any "real" problem in their sector?
Recessions in this country are sector related. The military industrials are doing well, for example.
The victims of this are at the margin and they are compounded in separate sectors.