Aug 25, 2012 at 10:27 pm
It’s a rainy Saturday here on the back porch so instead of yard work, how’s about a quick run through of some indicators of note re the current economy?
In sum, housing isn’t hurting the way it was, and that’s an important plus. But the usual headwinds remain in place, with a bit of added pressure from gas prices. European weakness is baked into the cake but the slowdown in German growth is steeper than most analysts expected. China’s slowing too.
Housing: Here’s about the nicest picture I have for you: the decline in the share of home sales that are “distressed,” i.e., short sales or foreclosed properties. A theme of mine around here is that one way we’re going to stop the slide in home prices will be through this sort of pattern, and it appears to be working, as can be seen in the second figure of three different price indexes.
Source: Goldman Sachs Research
As prices shore up, home equity begins to build, and my educated guesstimate is that perhaps close to a million formerly underwater homeowners are breaking the surface. And that in turn will mean more refis and a positive wealth effect.
That said, both of the figures above show other false starts, there are still at least 10 million underwater borrowers, and lots more foreclosures in the pipeline.
But my take is that the housing market is now much less of a drag on the economy than at any time since 2008 and if current trends continue, it will move from a neutral to a positive force on growth.
Gas: Prices at the pump have reversed and are going the other way. The peak of the summer driving season (greater demand), Mideast tensions, and some domestic supply constraints seem to be behind the reversal shown below. Most forecasts are for this to fall back in September, but on average across the nation, about 60% of the drop between April and the end of June has been eaten up by the recent increase.
Europe and China: Eurostat forecasts a slight contraction for the Euro area this year (-0.3%) which won’t surprise you, but part of that is driven by a sharp slowdown in Germany, where real GDP grew 3% last year but is expected to slow to 0.7% this year (the IMF projects 1%, not much better). This poses a real challenge to any theory of the euro-case that has Germany stepping up and paving the way forward for the weaker economies in the Eurozone.
China growth has decelerated as well (10.4%, 9.2%, 8%, from 2010, 11, and forecast for 12; IMF) and a concern here is that as their exports have lagged, they will move to suppress the value of their currency, which has in fact weakened in recent months relative to the dollar, though this is also likely related to their slower growth.
That said, our exports have done a bit better than expected and the trade balance looks to have been less of a drag of Q2 GDP growth than was first estimated. No question that Europe’s troubles are and will continue to shave basis points off of US GDP growth, but perhaps less than some of us expected.
Putting it all together, my read is that the good news from housing is the biggest deal here, though I’d still describe it more as bumping along the bottom than adding much to growth. But that’s actually a big improvement and the longer the recent more positive trend persists, the more home equity will be built back up, and that matters a lot going forward.
I’d say the housing market’s improvement has helped the US economy nudge closer to trend growth, which, given Congressional dysfunctionality and global stressors is not bad, but neither is it great—we still need a number of quarters well above trend to make up more of what was lost.
The key thing is the job market—if the 160K pop for July holds in the revision and we get a decent August number as well, I’ll feel a bit more confident about even this tepid upgrade.
And then there’s the fiscal cliff…
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