Reasons Why The Jobs Recovery Is Real This Time," the Associated
Press details what I would consider to be the positive spin on a
variety of economic and political developments [highlighted in red italic for clarity].
In the interest of fairness and balance, I thought it only right to annotate
each of their bullet points with statistics, reports, and arguments that show
things in a different light:
COMPANIES CAN'T SQUEEZE MORE OUTPUT FROM WORKERS
right after the Great Recession, companies shrank their work forces because
demand plunged and fewer workers were needed.
started growing again, companies were reluctant to hire immediately. They
managed to produce more with the employees they had. But now many companies
are finding they can't continue to do more with less. As demand grows,
they're finding they have to hire.
As I noted in "Not So
suggests that's not quite correct. As the following chart shows, a relatively
sharp deceleration in the rate of productivity growth -- like we've seen
recently -- has, except on two occasions over the past five decades, preceded
or been associated with a slowdown
in the pace of hiring.
CONSUMERS ARE STURDIER
recession, households have cut their debts and rebuilt savings. One key
measure of household debt burdens — debt payments as a percentage of
after-tax income — is at its lowest point since 1994, according to the
finances are fundamentally healthier than they were," says Stuart
Hoffman, chief economist at PNC Financial Services Group.
As the labor
market has healed, Americans have worried less about losing their jobs. As a
result, they're less likely to curtail spending — even in the face of
shocks such as a 29-cent jump in gasoline prices in the past month to an
average $3.78 a gallon.
But are they
really better off than they were? As the following chart shows, per capita
consumer debt outstanding -- that is, the amount per person -- is only 3.4
percent below its 2008 peak, and nearly 50 percent above where it was at the
start of the last decade.
TENSIONS EASE IN WASHINGTON
showdown waged last summer between the Obama administration and congressional
Republicans rattled confidence in America's leadership. It looked as if the
United States might default on its debts for the first time in history
because leaders couldn't reach a deal.
thanks in part to election-year pressures, tensions have eased. Republicans
dropped threats to let the payroll tax expire. And in an unusual show of
cooperation, House lawmakers from both parties backed a bill last week to
make it easier for small businesses to obtain financing they need to hire and
All I can say
is: Just wait until the summer rolls around, the Republicans have chosen
their candidate, and each side begins doing its best to inflict maximum
political damage on the other side. At that point, the economic uncertainty
and concerns about the future that have already impacted corporate
decision-making will have an even more corrosive effect on overall activity.
Anybody who thinks otherwise is kidding themselves.
IS INCHING BACK
The collapse of
real estate lies at the heart of America's economic problems. House prices
have plunged 30 percent since 2006. The drop has wiped out $7 trillion in
homeowners' equity. Millions of construction workers have lost jobs.
Now, there are
tentative signs of recovery. Apartment construction is growing. Construction
jobs are slowly returning. Home builders are seeing more foot traffic and
gaining confidence that sales will pick up in the spring buying season.
No one expects
another boom. But real estate is no longer subtracting from U.S. employment.
And there's hope among economists that higher sales could stop prices from
falling further by spring.
prices stabilize, more people will likely decide it's time to buy. And
consumers who worry less about a loss of home equity — the main source
of wealth for most people — are more likely to keep spending.
take issue with the notion that a bottom is at hand, as Zero Hedge reports in
Housing Recovery - Case Shiller Shows 8th
Consecutive Month Of House Price Declines":
Little that can
be added here. The December Case Shiller came, saw,
and shut up all those who keep calling for a home price recovery. The Index
printed at 136.71 on expectations of 137.11, with the prior revised to
138.24. The top 20 City composite was down -0.5% on expectations of a 0.35%
drop. 18 out of 20 MSAs saw monthly declines in December over November, with
just the worst of the worst - Miami and Phoenix - posting a dead cat bounce,
rising 0.2% and 0.8% respectively. And granted the data is delayed, but the
fact that we have now had 8 consecutive months of home price declines even
with mortgage rates persistently at record lows, and the double dip in
housing more than obvious, can we finally shut up about a housing bottom?
Because as Case Shiller's David Blitzer says:
"If anything it looks like we might have reentered a period of decline
as we begin 2012.” QED
of prices, the housing market ended 2011 on a very disappointing note,”
says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “With
this month’s report we saw all three composite hit new record lows.
While we thought we saw some signs of stabilization in the middle of 2011, it
appears that neither the economy nor consumer confidence was strong enough to
move the market in a positive direction as the year ended.
prior three years of accelerated decline, the past two years has been a story
of a housing market that is bottoming out but has not yet stabilized. Up
until today’s report we had believed the crisis lows for the composites
were behind us, with the 10-City Composite originally hitting a low in April
2009 and the 20-City Composite in March 2011. Now it looks like neither was
the case, as both hit new record lows in December 2011. The National
Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from
its 2nd quarter 2006 peak. It also recorded a new record low.
general, most of the regions also posted weak data in December. Eighteen of
the cities saw average home prices fall in December over November. Seventeen
of the cities have seen monthly declines for at least three consecutive
months. In addition to both monthly composites, 10 of the cities saw home
prices fall by more than 1.0% during the month of December. The pick-up in
the economy has simply not been strong enough to keep home prices stabilized.
If anything it looks like we might have reentered a period of decline as we
AND LOCAL GOVERNMENT CUTS SLOWING
Recession and the housing collapse dried up tax revenue for state and local
governments. Many were forced to lay off teachers and other public workers.
Since December 2008, state and local governments have slashed 613,000 jobs,
offsetting some of the hiring by private companies.
But the cuts
appear to be easing. State governments have added 10,000 jobs so far this
year. Local governments last month added 2,000 — a modest total but only the third increase in two years.
only so many teachers you can cut, so many police officers, so many
firemen," says Mark Vitner, senior economist
at Wells Fargo Economics.
Who says things
can't get any worse? In "Meredith
Whitney Was Right" Fortune's Term Sheet blog suggests problems in that area of the economy
may actually be approaching a crisis point.
FORTUNE -- To
readers of the business press, the story is a familiar one: fifteen months
ago, superstar analyst Meredith Whitney rocked the world of municipal finance
with a December 2010 prediction on 60 Minutes that a wave of municipal debt
defaults was headed our way. Her forecast was quite specific: "You could
see fifty to a hundred sizable defaults," she told her interviewer,
correspondent Steve Kroft. "This will amount
to hundreds of billions of dollars' worth of defaults."
The bottom fell out of the muni bond market as a result. Investors pulled
some $14 billion from muni bond funds between December 22 and February 2,
2011, and returns in the fourth quarter of 2010 were the lowest in 16 years.
Long-time players in the space, including analysts, fund managers, and muni
brokers, reacted with indignation that an arriviste such as Whitney—the
woman who made her name calling out Citigroup (C) as an emperor with no
clothes at the dawn of the mortgage crisis—dared to try to expand her
analytical purview into their cozy little corner of the capital markets.
She was wrong, they said. She didn't know squat about how their market
worked. The kind of defaults she called for were never going to happen. And
they were right, in the most literal sense. Since then, there have only been
$2.6 billion in defaults from the $3.7 trillion market. And the muni bond
swoon didn't even last very long: in 2011, Barclay's muni bond index returned
10.7%, more than five times the 2.1% return of the S&P500.
Nothing satisfies like a comedown of a prominent prognosticator, and Whitney
has taken her lumps in both the business press and the more unbridled
blogosphere ever since. She deserves at least some of it, but that's only for
being overly specific. The more general point that she was trying to
make—that municipal finances in this country were a mess that was only
going to get messier—was dead on. Laugh at her all you want, but then
try this: go find one person who says their local taxes are falling or their
municipal services have improved in the past year or two. I wish you luck in
"States have pushed more and more expenses down to the local
level," Whitney tells Fortune. "And municipalities don't have the
money to make up the difference. That is where you see the real strain,
especially after the American Reinvestment Recovery Act expired in June
email I received on March 7 from former New York State Assemblyman Richard
Brodsky about Yonkers Mayor Mike Spano's recently
formed Commission of Inquiry into what he refers to as that city's
"Great Unraveling." (Brodksy is serving
on the commission.)
has] a budget of about $1 billion and a budget gap in the upcoming year that
looks like it can't be bridged. There are reasons aplenty. Like may urban centers the Yonkers manufacturing base
disappeared, the middle-class moved out and the people simply can't afford
the property and sales tax burden that ensured. Anti-tax fervor hit and
elected officials refused to raise recurring revenues. Gimmicks, one-shots,
borrowing for operating expenses, assets sales, and assorted maneuvers
'kicked the can down the road' for a couple of years…The city has now
run out of gimmicks."
And then he
sounds very Whitney-like: "It's as though we stand on the shore and
watch a tsunami gather and shrug and hope we'll get through it…That
needs to change, and if the list of endangered cities gets larger this will
force itself onto the national stage. [For now] the great national battle
about the size of government and the level of taxation will be played out in
the streets of small cities across America, with school kids, garbage
pick-up, fire-protection, and safe streets competing with each other for
inadequate resources. It's an ugly way to solve a problem."
And then there
are reports like this:
Push N.Y. Cities and Counties to Desperation" (New York Times)
It was not a good week for New York’s cities and counties.
Rockland County sent a delegation to Albany to ask for the authority to close
its widening budget deficit by issuing bonds backed by a sales tax increase.
Suffolk County, one of the largest counties outside New York City, projected
a $530 million deficit over a three-year period and declared a financial
emergency. Its Long Island neighbor, Nassau County, is already so troubled
that a state oversight board seized control of its finances last year.
And the city of
Yonkers said its finances were in such dire straits that it had drafted
Richard Ravitch, the former lieutenant governor, to
help chart a way out.
Even as there
are glimmers of a national economic recovery, cities and counties
increasingly find themselves in the middle of a financial crisis. The
problems are spreading as municipalities face a toxic mix of stresses that
has been brewing for years, including soaring pension, Medicaid and retiree
health care costs. And many have exhausted creative accounting maneuvers and
one-time spending cuts or revenue-raisers to bail themselves out.
EUROPE'S THREAT HAS SUBSIDED
panicked last year over the prospect that Greece and some other European
countries would default on their debts, stick banks with huge losses and
trigger a global credit crunch. Such fears sent stocks tumbling and helped
diminish U.S. consumer confidence in the second half of 2012.
is rebounding. Greece has received a $172 billion bailout, pushing back the
threat of a destructive default. And the European Central Bank has made more
than $1.3 trillion in low-rate three-year loans to banks since December,
making clear it won't let the European banking system fail.
been paying attention would know that the problem goes beyond Greece. Other
countries in the region are similarly exposed, as Forbes notes in "After
Greek Default, Spain And Portugal Pose Major Risk":
With the Greek
problem off the table for the very near-term, markets will turn their eyes
mainly to Portugal and Spain as the European sovereign debt crisis continues.
Portuguese sovereign bonds (PGBs) are still trading at distressed levels,
with the spread over German bunds at more than 1,200 basis points.
sovereign debt crisis is far from over. While Greece’s managed default
marks a break in the road, and markets appear calm in its aftermath, the
remaining PIIGS are still under pressure. Schauble
noted a third bailout for Greece can’t be ruled off, while Barclays
suggests PSI remains a possibility in Portugal. For now, though, the major
risk of a disorderly default in Greece has passed. This could be the calm
before the storm, though.
it's not just sovereign states in the region that are at risk. According to
the New York Times,
the banking system also remains on shaky ground.
Shows Depth of the Distress in Europe"
— While the European Central Bank’s emergency loan program late
last year helped avoid a banking crisis, there is doubt over whether the
action will promote economic growth by encouraging lending to businesses and
consumers, according to a new report by the Bank for International
remain highly leveraged and will not be able to substantially step up lending
until they have further reduced risk, said Stephen Cecchetti,
head of the monetary and economic department at the Bank for International
Settlements, which acts as a clearinghouse for the world’s central
banks and released its quarterly report late Sunday. Emergency loans provided
by the European Central Bank will help stabilize banks, but it will take a
while for the money to reach bank customers.
expect banks to respond by increasing their lending,” Mr. Cecchetti said during a conference call with reporters on
BANKS LENDING MORE TO BUSINESSES
September 2008 collapse of Lehman Brothers shook the financial system, U.S.
banks cut loans to businesses in 2009 and 2010. The credit crunch fed the
economy's misery by starving many companies of financing needed to grow and
But banks are
healthier now. So are the prospects for their business customers. Bank
lending to businesses rose nearly 14 percent last year to $1.35 trillion,
according to the Federal Deposit Insurance Corp. Loans to small businesses
grew at the end of last year for the first time since the FDIC started
tracking them nearly two years ago.
Dunkelberg, chief economist of the National Federal of Independent Business,
says the outlook for hiring by small businesses offers "a better picture
than we have seen for years."
true, but it appears to be at odds with reports like these:
Scramble as Banks Call in Loans" (News & Observer)
has been battling for months to avoid foreclosure on his small company's
offices in Chatham County, a scenario that he says
would put him out of business. He faces this predicament even though he's
been diligently making the monthly payments on his loan.
that his lender, SunTrust Banks, hasn't been willing to renew his five-year
commercial real estate loan, which ran out in June. In the absence of a new
loan, he owes SunTrust a balloon payment of more than $200,000 - money he
don't shoot the people that have been good to you," Matthews said,
referring to his years of doing business with the Atlanta-based bank.
"It just isn't right to take someone's business who
has made all the payments and has played by all the rules."
Banks Won't Lend to This Guy's Profitable Business" (Bloomberg)
customizing video game controllers for gaming addicts who want to shoot
faster can be a decent business. Tim Erven says his
five-year-old venture, Custom Gaming in Whippany, New Jersey, has been
profitable since he started it, with revenue around $300,000 in 2011, and
some 250 orders a week now, mostly through its Amazon storefront.
To keep up with
demand, the 22-year-old has been trying to get banks to lend him as little as
$10,000 to improve his website and rent a warehouse near
his home. The six banks he’s approached have rejected his applications
because of his age and because he hadn’t gotten a business loan before,
even though his tax returns show profits and his parents were willing to put
up their home as collateral. “From what the banks told me, asking for
10 percent of my annual revenue was reasonable, and what tends to be
conventional, but even by decreasing the amount I was seeking I was still
unable to obtain approval,” says Erven, who
juggles balances on six credit cards to manage cash flow.
situation isn’t unusual for small business owners navigating
post-crisis banking. A recent National Federation of Independent Business
study shows that even while demand for credit is on an upward trajectory, the
number of small employers able to land a bank loan has not moved in parallel.
Bank credit for small firms (defined as businesses with annual sales of less
than $50 million) has been ticking up, slightly, since the third quarter of
last year, according to the Federal Reserve’s quarterly surveys of
senior loan officers and other government data. “But it should be much
stronger at this point in the economic recovery,” says Paul Merski, chief economist at the Independent Community
Bankers of America in Washington.
One reason, not
surprisingly, is that many U.S.-based lenders aren't on a particularly solid
footing, as Bloomberg
reveals in "Shaky
Banks Still Haunt the Bailout":
taxpayers are in the black on the program that bailed out banks. But weaker
banks that haven’t repaid their loans may still leave us in the red.
That’s the problem the Government Accountability Office points to in a
new report looking at the government’s single largest bailout effort,
the Capital Purchase Program. Treasury started CPP in October 2008 to provide
liquidity and stability for banks. Ultimately Treasury propped up more than
700 banks with almost $205 billion. The banks make dividend and interest
payments to Treasury; then, to exit the program, they repurchase warrants and
preferred shares and repay loans. The GAO says those revenue sources have
brought in $211.5 billion for taxpayers—a $6.6 billion profit above the
initial infusion into the institutions.
picture’s not all rosy. First, the GAO says that almost half of the
banks that have exited CPP did so by refinancing their debt into other
Treasury-run programs, in particular the Small Business Lending Facility and
the Community Development Capital Initiative. Second, the GAO highlights 366
banks that haven’t repaid CPP and still owe a combined $16.7 billion.
Those banks, the GAO says, are less healthy than the banks that have already
repaid CPP and other similar-size banks which didn’t participate in the
program at all. In December 2011, 130 of the remaining banks were on the
FDIC’s “problem” bank list, meaning their viability is
threatened by financial, operational, or managerial problems. And 158 banks
missed their quarterly interest and dividend payments to the Treasury in
Michael J. Panzner