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President-Elect Obama: You Inherit an Economy in Shambles
To President elect Obama: congratulations. You have won an impressive victory. However, there is much work to be done. Most people who voted felt the economy was the most important issue. There is a good reason for that: the economy is in terrible shape and stands a high possibility of getting worse.
Let's start with employment.
The year over year rate of job creation has been dropping for the last two years. In addition, each month of 2008 has seen continuing job losses.
In addition, the unemployment rate has been increasing since early 2007.
These charts tell us the employment situation has been deteriorating for some time. In other words we have a medium-term trend in place. And that trend is getting worse. The following charts are for the number of people unemployed for 5 - 14 weeks 14 or more weeks and 27 or more weeks. Note that the number of people in each category has been steadily increasing the beginning of 2007 and has really taken off in 2008.
And as this chart from the blog Calculated Risk shows, unemployment claims are clearly at recessionary levels:
The charts above indicate very clearly that getting people back to work should be a top priority.
But this isn't all. In fact, it's only part of a larger problem. Manufacturing has been dropping as well. Consider the following charts:
Overall industrial production has been dropping for nearly a year:
And the national level ISM manufacturing number has been declining since the beginning of 2004 and just recorded its lowest level in that time period:
As a result, the US is using less of its total manufacturing capacity:
In other words, US manufacturing capacity is in poor shape as well.
Now we move to housing which I will break down into new and existing homes. New home sales comprise about 10% of the existing home sales market. Therefore they are less important. But we'll go over them anyway. (The following graphs are from the blog Calculated Risk)
The good news with new home sales is total inventory has been dropping for a while now:
However, sales have been falling off a cliff:
This means there is still a ton of inventory available at the existing sales pace.
On the existing home sales front we have a slightly different story. The sales pace seems to have leveled off (at least for now):
But the total homes available for sale is still increasing:
Leading to a higher and higher "months of inventory available at the current sales pace":
The bottom line with new and existing home sales is simple: there is still a ton of inventory to clear. As a result, prices are dropping big time and probably have a long way to go:
This discussion of the housing market leads perfectly to a discussion of the financial meltdown. As the chart of housing prices above indicates housing was clearly in a bubble over the last 8 years. To finance that bubble the US consumer added a ton of mortgage debt to his balance sheet. Here is a chart from the blog Prudent Bear that shows the huge increase:
All of the debt had to go somewhere. Thanks to securitization everybody and their brother wound up owning mortgage-backed debt. However a large number of these mortgages started to go bad. As a result:
Financial firms worldwide have posted almost $700 billion in credit-related losses and writedowns since the beginning of 2007, in the worst economic crisis since the Great Depression.
This is the reason Congress passed the $700 billion dollar bail-out package about a month ago. And considering the size of the losses we've seen from the financial sector another bail-out may be in the cards.
And this is on top of a terrible overall federal fiscal situation. President Bush decided to once again try and prove that supply side economics works. Unfortunately reality entered. Here's a reading of the last 8 years of total federal debt outstanding from the Bureau of Public Debt:
09/30/2008 $10,024,724,896,912.49
09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86
The current total is $10,566,146,196,490.58 In other words, federal finances are in terrible shape.
There is also the issue of personal savings which are now (and have been) hovering around 0%-2% for the last several years.
Basically Americans are spending everything they make.
And finally there is the trade deficit which has really gotten out of control over the last decade:
Simply put, the economy is in terrible shape. Job losses are mounting manufacturing is slowing and there is no bottom in sight for housing. The federal government is issuing tons of debt, the US consumer is not saving anything and the trade deficit is at a scary level.
However, there are solutions to there problems. And that's what we'll tackle in the next article.
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"However, there are solutions to there problems. And that's what we'll tackle in the next article."
Solutions like making the next bailout one for the consumer... how about something like " From this moment all consumer debt is forgiven... you all owe nothing on your houses, you all owe nothing on your cars and computers and boats and flat screen high definition LCD televisions... We are all going to start over,"
all these charts to tell us that the economy sucks... try living in mississippi... we know it sucks. We know we have no manufacturing jobs... and the folks that keep saying "We americans have to own up to our bad habits of borrowing and living large" they have to own up to the fact that what has been keeping our economy going over the last several years is debt! For the bankers and the market brokers and the "ownership class" to make more, someone has to be spending... someone has to be borrowing...
somehow our system has found itself skewed... the whole world is going into a financial black hole and maybe it should... we need, not fake jobs, not bailouts or rescue plans, we need a new paradigm, a different base from which to start completely over and for that to happen the house of cards must fall... painful as it will be.
There is an elephant in the room, called inflation. Low inflation equals virtuous. The world has lived with two to five percent for decades. Economies that go above are thought dysfunctional
Why is inflation bad? People on fixed incomes lose out, but not if pensions and annuities are index-linked. Inflation discourages saving? Only uncertainty about inflation does that. If it is high but steady you save, demanding a bigger nominal return to offset loss of capital. Banks survive by raising loan interest rates to compensate for loss of real value in debt.
What business likes is stable, predictable inflation. I was at the top of a large international company during high inflation and we just read accounts differently, but had no problems. Inflation brings flexibility. Compensation should fall in failing activities so workers seek opportunities elsewhere—easier to keep pay fixed and let inflation do it for you.
A steady but higher rate of inflation, say in the range six to eight percent a year, would halve debts in real terms in eight to eleven years. House-owners in negative equity who survive a few years see their problem right itself. With higher inflation interest rates rise several percent, yet business can pay more for money because it sees debts liquidating.
Pursuit of ‘sound money’ helped create the Depression. Now we have done it again. So why deny the elephant in the room? Perhaps because we do not understand elephants as well as we should.
Putting people to work on nationally established goals is priority one. This work must be directed towards creation of production, efficiency, effectiveness and value. In that way we may begin to gain the national income and strength to repay unprecedented, disastrous debt. Oh, by the way, we must place restrictions on products that can be manufactured or grown in this country. A modern country is impossible without viable manufacturing and technology.
Never again must we allow imports to exceed exports. Bondad, come up with better ideas.
... and there's not a whole lot the President elect can do about it.
Despite all the hoopla surrounding his election, Mulatto Joe is being served up for epic fail ... divided about fifty-fifty between his faulty far left ideologically driven policies and the "shambles" he is being given to work with.
Ross Perot was right. We no longer have a manufacturing base in America. We sent all those jobs over seas in that mighty sucking sound during the last 15 years or so that Ross predicted. Now we are a service economy. The owner of the service (McDonald's,Dollar Store,Dairy Queen,Payless Shoes.etc.,etc.) makes all the money, while the employees make minimum wages. Prices go up, wages go down, buying power decreases, Dept Increases, yet it is Banks we protect at all cost. Congress passes laws to protect banks from bankruptcy, while making it harder for average Americans to file said Bankruptcy. People on SS have a harder and harder time making choices on what to buy. Medicines, Gas, Groceries, Light bills. Or Rent, yet cost of living increases hardly keep up with the rising cost of supplements and drug increases. The last 8 years the Government was squarely on the side of Big Business. Even Our new Vice President Elect was on the side of Big Business on a few votes in Congress. it will not end until Lobbyists quit buying the vote of Congressmen. I do not see that happening in my lifetime.
Your analysis is spot on. We have gone from a great manufacturing economy to a hamburger flipping economy (i.e., service sector). By the way, this has all come under the banner of "free-trade" which is just a euphemism for off-shoring and labor arbitraging. This has to stop.
yep Doug. Nixon taking us off the gold standard which was the ultimate regulator will have him laughing at us from the grave, all to fund useless horrible wars. Oh, what is it I hear? Folks like Sarkozy in France and the Prime Minister in the UK calling for a new 'Bretton Woods'. Of course they are 'friends' of the central banks who like the power to create money out of thin air..trust us they will say. Gee, there are precious metals shortages in the physical markets everywhere but, of course, the gold bugs are nut bags...right? As nutty as private central banks having gold reserves....I guess the private central banks are 'conspiracy theorists' too. We'll see whether we want to or not.
Doug, we replaced manufacturing with the "great financial industry", this is where Wall St. gangsters make billions out of thin air(or from the gullible willing to give up their hard earned money for them to "invest" it), ha ha.
Going forward there are many things to do and not to do. Stimulus checks are a bad idea very little bang for the buck, fleeting, costly and damaging from a debt standpoint. Additional tax cuts while popular pandering will only exacerbate the debt and make the withdrawal from deficit spending more painful.
Americans need to own up to their habits. Being pampered by tax cuts using borrowed money, easy credit to live beyond their means and a slovenly wasteful Government on everything from welfare to warfare has to stop. No amount of tax cutting, stimulus checks and bailouts will solve our problems. Morphine does not cure cancer.
Now is not the time to hide. While the politically expedient tax cuts will have to be enacted they should be qualified as only temporary measures to jump start the economy. It should be noted that the Bush deficit will have to be addressed. Likewise, the Wars will have to be ended and military spending curtailed to fully address the domestic problems. Financial institutions will either be allowed to fail or be bought out for pennies on the dollar by the Government just like the markets would do. Infrastructure spending to create real jobs in the private sector must be ramped up quickly. Putting construction workers back to work will be a huge stimulus (especially for our brewers). Similarly, tax credits and subsidies for alternative energy should be substantial and immediate. Entrepreneurs will solve the problems faster and cheaper than Government.
How about putting more money into existing big highway, road and bridge projects?
Why wait for new projects to get planned when we can get more people employed now and spending that money on their mortgage or a new car.
This isn't the answer to whole shooting match but it certainly seems like a reasonable step to take.
Ed V.
Hale,
I think Obama knows what he is facing. He seems to like a challenge.
Best regards.
Here is another issue about our current problem that is different than prior problems: After the sav & loan crisis, mortgage rates were in the 9.0% range diminishing a bit from the Volker era. Into the Clinton years mortgage rates dropped to 7.0%, then 6.0% and eventually on to the teaser rate era of 3.75% or neg amortization in the 2005 range of the Bush era. This fall in rates precipitated the ever amazing increase in home values (houses are just like the bond market). And here is where the difference sets in, today we are at the bottom of interest rates with fed funds at 1.0%. From here, rates will go up (your guess is as good as mine on timing) and along with this the value of homes will come down. Ouch... so while slick Willie saw rates come down, Obama and his follower will most likely see rates increase and along with that the financial fall in the value of homes. So this is an entirely differenct context that we will be entering into.
Home prices NEED to come down, the average american cannot afford them. And car prices need to come down as well.
They are currently inflating us out of existence and have gone to far. At this rate we will all be unemployed and bankrupt before long.
Home prices are affordable for the average American in most the country. As for car prices, there has been little inflation in that area for many years. Here is a quote from November 2005:
"Comerica says it took 26.2 weeks' worth of an average person's salary to buy a new car in the third quarter, up nearly six weeks from the second quarter of 2004, which was the most affordable period in 25 years."
I listen to McCain and Obama for that matter talk about rescue to prevent the fall of home prices. However, if there is anything that the right wing has right about the bitterness of captalism, that is that the market has to determine the bitter bottom. If the government comes to the rescue to prevent the markets' determination of housing prices then the inevitable will only be prolonged. I am only a sample of one, but I would not purchase a home for investment until I am convinced that the bottom has been reached. I can get 5.75% financing at my local credit union fixed 30 yr mortgage which is a wonderful rate, but with prospects of rates continuing low and housing prices to fall further why would I move? And the government (McCain of all people) wants to intervene, it is hard to imagine. I remember well in the 1980's when farm land that had value of 3000 per acre as a rule of thumb dropped to 1000 per acre. 20% of farms in the country were expunged and noone, especially the government seemed to give an aerial copulation. And now... they do not want inflated house prices to drop to a market equilibrium.
Always love your charts, Bondad!
There is no inventory problem in physical precious metals, its just shortages everywhere.
Somebody is sitting on it....the mines haven't stopped working, you know.
or big investors such as private central banks are buying all their production.
I agree strongly that creating jobs for the middle lower class and promoting small businesses is the way to rebuild this economy. The right says no, because they don't read enough to know that 70% of our economy is consumer spending based & most consumers come from the middle class. A quick way to show your support for local businesses is to stop buying from those that would send their money overseas. People say that they buy goods from the Walmarts and other giants because they save money.
By depreciating the American dollar, they have a little more cash to buy a nice dinner out on the town. For Shame! Are we really that spoiled? Yes, for the most part.
Time to wake up, America. Social & financial responsibility is not "socialism", it's called managing your money and not behaving like children with gold cards. Our grandparents could teach us a thing or two about it.
On the subject of bailing out the auto makers: If I ran a business into the ground for lack of foresight, could I ask for free money and low interest loans backed by taxpayer dollars? No. Should the Fed loan them money? Maybe, but at a rate that reflects their irresponsible business management. Or, crazy idea-let another company buy the damaged GM or Ford and make them work. The time for nostalgia is gone. Who cares if they are 100's year old U.S. brand names if they continually drag the economy into the dirt?
Please give me a list of places I can buy from that do *not* have goods that come from China. Simply put, you can't buy a shirt made in America if you tried.
Here is a link, a census linq that provides information on a country by country basis with imports and exports broken down pretty sufficiently. You can look at imports from China. The profits of Nike etal are on the backs of many people, those who are paid little and those who have no jobs. And Nike etal make out like bandits.
http://www.census.gov/foreign-trade/balance/c4039.html
Granted it is very difficult. But you can at least support the local businesses in your community by buying there. The fact that the big box store has squeezed everything into a niche, forcing people to go to three different stores if they want groceries and maybe a hammer is no accident. They prey upon the laziness of people with busy lives. Take an extra 15 minutes to avoid the big box and buy goods from your neighbors, who you can talk with in person, and ask them to try to get U.S. made products. We've gotta start somewher, might as well be at home.
Try:
http://www.apparelsearch.com/America.htm
I buy most of my clothes from resale shops. Which really doesn't count but it does stimulate a "greenish" part of our Minneapolis economy.
I agree with Milwaukee Dan, jobs is the answer much like the WPA of the 30's & 40's. Also force banks to rework mortgages rather than foreclose. In this economy at least the banks would still be getting some income from the loan rather than having the house for sale with no buyers in sight.
Infrastructure" spending can be good for the economy as long as the money is not allocated towards things of dubious value, e.g. subsidies for Amtrak, some high speed rail lines that few people will use, or many of the 1930s WPA and CCC projects that were the equivalent of moving dirt from one pile to another.
I lived in a dorm that was built during the depression by a WPA project. it was still providing value 30 years later. Many of today's airports were built the same way. Dirt from one hole to another just like your posts.
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