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Dismal News Is Not Quite So Dismal
By: Dr. Charles Lieberman
Date: 2/2/2009
The outlook is growing less dim, even as the latest data report the economy's travails. Economic reports are likely to show signs of a weak or contracting economy virtually across the board, including this week's employment report. Even so, conditions for recovery are falling into place. Inventories are falling rapidly in the housing sector, while credit markets are recovering.
Existing home sales surprised investors to the upside and seem to be stabilizing, falling just 3.5% over the past year. But the sizeable decline in housing inventory was largely overlooked, as homes on the market fell by 11.7% in just one month and almost 20% since peaking in July, 2008 at 4.6 million. Unsold new home inventories have been falling for longer, but they are also down sharply, almost 40% from their peak in July 2006 to just 357,000, a level that could be characterized as normal, (although high concentrations of unsold new housing in California, Florida and Las Vegas implies that other regions probably have little excess new housing inventory.) With new construction at the depressed level of 525,000 units annually and household formation of close to 1.5 million, it will not be long before inventory for sale becomes scarce, requiring a rebound in new construction. A bottom in housing remains on track for spring 2009.
Q4 GDP declined 3.8%, far better than the 5.5% consensus estimate and the 6% to 7% declines that were talked about just weeks before. The surprise came from the inventory component. Typically, when demand weakens so muchfinal demand fell about 5%--inventories back up significantly and people worry that inventories will need to be worked off in coming quarters. In fact, non-farm inventories increased just $4 billion, a very modest sum, suggesting that firms adjusted production fairly rapidly to the decline in sales. Also quite notably, GDP would have fallen just 1.8%, if motor vehicle production had not declined at a 64.3% annual rate. Consumers remain cautious, so a quick turnaround is unlikely for autos, but neither is another huge decline in spending, particularly since real household income and saving both increased, even as consumers spent less.
Credit markets continue to improve, a critical requirement for any possible recovery, as January set a record for bond issuance. The market absorbed about $100 billion in maturing commercial paper owned by the Fed. The economic news should remain soft, including this Friday's employment report, but the momentum to recovery does appear to be building. A fiscal stimulus package and ongoing improvement in credit availability should be significant contributors to that outcome.
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