Thursday, September 27, 2007

Be Your Own Economist ®

Today’s San Francisco Chronicle carried this Associated Press story with Alan Zibel’s by-line: “Traders bet home prices will drop – recession predicted.” Here are the lead paragraphs.

“U.S. home prices have fallen further since mid-2006 than during the 1990-91 recession, and professional traders bet they’ll plunge up to 10 percent more the next year.

“If the speculative traders making the big-money bets on where housing prices are headed are right, the question is not whether a U.S. recession is ahead but when it will start.”

A number of statistical releases over the past few days support this gloomy assessment. Today the Census Bureau announced ( that August new-home sales had fallen to 795,000. Take a look at Chart 21 (New Home Sales) and Module 5. It wasn’t long ago that new-home sales peaked at roughly 1,300,000. That’s a half-million more than the most recent figure and reveals that new-home sales have fallen by more than one third from their peak. If new-home sales fall by another 150,000, down to 650,000, that will represent a 50% drop. That’s the amount new-home sales fell during the last few recessions. Also note that new-home sales have fallen to where they were in the late 1990s. All of the gains from the bubble’s recent expansion have leaked out. That’s not a good sign.

On September 25 the National Association of Realtors revealed ( that existing-home sales had fallen to 5.5 million and that home prices continued to erode. Another look at Chart 21 (Existing Home Sales) shows existing-home sales well down from their recent peak of roughly 7.0 million. That slide lets almost all the air out of the bubble. If existing-home sales drop to 5.0 million, we’ll be back to where we were in the late 1990s. You should also note that we haven’t had an existing-home sales fall-off of this magnitude for 25 years. Another bad omen.

When will residential real-estate woes finally bite into the economy’s overall performance? We need to look at consumer confidence and business investment for additional clues. Stay tuned.

Note: You’ll find chart references at Module references are to an online course that is under construction.

Thursday, September 20, 2007

Be Your Own Economist ®

September 20, 2007

Welcome to the second posting of the Be Your Own Economist ® blog. Its purpose is to stimulate your interest in recent economic developments and the investment climate. We’ll go to government and private web sites to retrieve the latest data (see the discussion of today's economic indicator report below). Then we’ll apply the lessons learned in the Be Your Own Economist ® online course to interpret these data. That will help you become your own economist by placing these data in historical perspective for a broader and deeper understanding of current events.

Let's begin.

Yesterday we examined the latest housing-starts data. Residential construction has sagged for over a year and the downward trend continues. We noted that dwindling construction activity pulls other sectors of the economy down with it.

Today the Conference Board, a New York business group, released its index of leading economic indicators. The federal government developed this index years ago and then transferred it to the Conference Board. The index combines ten statistical measures into a single series designed to foretell the economy’s direction. A slumping index can signal a recession ahead.

The most recent report ( puts the index at 137.8 and says the index fell sharply in August. You can see in Chart 1 that the index reached its all-time peak in early 2006 and has fallen slightly since. This stagnant performance and August’s drop is cause for concern. Remember that housing starts also fell from their early 2006 peak.

The question before us is: Will the economy pull out of its recent stall, or is this slowdown an omen of coming events? When you turn to Charts 24 and 25 you notice that interest rates fell sharply at the Fed’s behest during the 2001-2002 slowdown, but the decline in rates was insufficient to stem the economy’s slide. It took a while, after the recession had run its course, for the economy to snap back.

The point is that falling interest rates may not be effective against a residential real-estate collapse. We just don’t know. In the 1970s rising interest rates typically brought an end to real estate booms. Depositors withdrew their funds from savings and loan companies because existing legislation prevented the S&Ls from raising the rates they paid depositors. When the S&Ls ran out of funds, the boom was over. Interest rates fell when recession hit and deposits flooded back into the S&Ls. They could lend once again and housing took off. The recession was over.

Recently interest rates stayed so low for so long that the boom ran its course without impediment. Real estate values rose speculatively in a kind of tulip mania, then began their long slide when the bubble burst. It’s hard to believe housing will recover as long as prices fall. Even if the Fed’s interest rate cut(s) alleviate the sub-prime mortgage crisis and credit-market stringency, that may be insufficient. The housing bubble may take its sweet time to deflate before economic growth can resume. We’ll see.

Wednesday, September 19, 2007

September 19, 2007

Welcome to the first posting of the Be Your Own Economist (R) blog. Its purpose is to stimulate your interest in recent developments that affect the economy and the investment climate, such as bulletins released by the government's data mill (see the discussion of today's housing report below). That will help you become your own economist by placing recent data in historical perspective for a broader and deeper understanding of current events. It will also enhance your ability to discuss recent developments with others on Be Your Own Economist's (R) Discussion Board.

Let's begin.

Yesterday the stock market reacted enthusiastically to the Federal Reserve's interest-rate reduction.

But today's Census Bureau release of housing starts data provides no reason to rejoice ( Housing starts fell to 1.3 million in August, about a million less than their recent high in January 2006. Housing starts' slide is ominous. Chart 20 reveals housing starts' collapse leading up to the 1990-91 recession. Are we headed the same way now?

The Census Bureau's report breaks out single-family construction at 988,000 for August. (Apartment-house construction accounts for the difference between the 1.3 million total and the 988,000 single-family figure.) The single-family figure hasn't been as low since 1993.

When you think of all the activity pulled by the housing-starts engine, e.g. lumber and building materials, appliances and furniture and furnishings, you can understand the cause for concern. Construction pulls a long train.

Charts 20, 24 and 25 reveal that the Fed avoided a housing-starts meltdown at the time of the 2000-2001 bust by slashing interest rates. The recession hit, but was mitigated by housing growth. Can the Fed reverse housing's current slide by reducing interest rates? That depends upon the extent to which high rates are today's problem, and the extent to which a drop in rates could stem housing's slide. Remember that the bursting of a speculative bubble instigated housing's recent collapse. When prices soared in an orgy of irrational exuberance, sales finally slowed and so did building. Now that prices have started to fall, potential buyers continue to hold back. Why buy today if the price may be lower tomorrow?

The Fed can't directly affect housing's price erosion, but it can mitigate mortgage-market stringencies by reducing interest rates. Lenders are more cautious today than they were at the peak of the boom, and that reduces all buyers' access to credit. Lower interest rates can offset that.

But housing is not the only fly in the economy's ointment. Profits and profitability, consumer confidence, business investment in new equipent and employment data all show that the current economic expansion is getting tired. Future blogs will deal with these data as they are relaeased. Stay tuned.