On the surface, the U.S. economy seems to be turning around. Many of the TV talking heads say so! Heck, the U.S. added 120,000 jobs in November, bringing the unemployment rate down to 8.6%. On top of that, retail sales from the Thanksgiving weekend were stronger than expected and manufacturing in the U.S. has been picking up. These figures have given the economy a sugar high that suggests all is well.
Sorry to be the naysayer, but just a little bit of drilling down exposes the soft underbelly of our fragile economy. On the jobs side, which is the most critical variable in the whole economic equation, jobless claims are still sky-high (402,000 in the last week of November) and most of the job gains lately have been in the lower-paying service sector. Higher retail sales are not sustainable because average incomes are flat or worse.
It amazes me that certain commentators can say with a straight face that Americans are diligently working to reduce their debt levels. Yes, it is true that household debt dropped by 0.6% in the third quarter, but a big cause of that fall was more people defaulting on their mortgages. The average foreclosure now takes 631 days from initial delinquency until foreclosure, so those homeowners are getting to live mortgage-free and rent-free for nearly two years. Some piece of that saved money no doubt contributed to the higher retail sales. With about six million houses in some stage of foreclosure, we are nowhere near the end of the real estate meltdown.
The economy is built on soft sand, with increased debt masquerading as growth. Although our government is bankrupt, it continues to spend massive amount of money that it does not have. The press recently reported that the Fed made $7.7 trillion (not billion) in loans and guarantees to banks during the early stages of the financial crisis. This week, the Fed agreed to essentially backstop bank loans for the entire world, again with money that it doesn’t have.
During this month of December, Congress has to vote on several major budget items, including extending the payroll-tax break, whether to extend unemployment benefits, adjusting payments to doctors under Medicare, and whether to raise the debt ceiling. Can anyone doubt that it will pass most of these but resort to accounting fiction to pay for them! Adult supervision is clearly lacking in Washington D.C., as it is in most state capitals.
As a note buyer of mortgages, it continues to amaze me that nobody seems to be calling out the facts on this. A note buyer or any other business person in the real world could never operate a legitimate business like this.
At some point, the crisis will reach such a level that the politicians will be forced to actually cut expenses (not just reduce growth), though they’ll go down kicking and screaming. In the meantime, I think that the economic shocks to this country are only just getting started.