Sunday :: Jun 3, 2007

Economic Lies

by Mary

What is the current state of our economy? Well, if you read the business pages of the US press, it would seem that we are doing quite nicely although it looked a bit dicey earlier this year. As the Chicago Tribune says,

The economy got the flu in the first quarter and flirted with a recession, but it's looking much healthier now, thank you.

There appears to be no downturn in sight as economic growth apparently rebounded in April and May from a near-swoon in January, February and March. And, in fact, this could turn out to be a good year of solid but steady growth, analysts said Thursday.


Anderson said the drag on the economy from the housing correction appears to have lessened in the first quarter. He said that in the second half of 2006 residential housing held back economic growth by 1.2 percent. In the first quarter it subtracted 0.87 percent from GDP, he said. Still, some analysts said they remained worried about further housing declines.

Then there were those great employment numbers released on Friday.

U.S. job growth accelerated, consumers spent more and a measure of prices was little changed, showing the economy is recovering from its slowdown without a surge in inflation.

Payrolls increased last month by 157,000, more than economists predicted, after a gain of 80,000 in April, the Labor Department said today in Washington. The jobless rate stayed at 4.5 percent. The Commerce Department reported that personal spending rose 0.5 percent in April and the gauge of inflation most closely watched by the Federal Reserve rose 0.1 percent. Subsequent figures showed manufacturing grew at a faster pace and consumer confidence strengthened.

So how does your pocketbook feel today?

If you are one of the many people who have an Adjustable Rate Mortgage that is coming up for adjustment, you might not be so sanguine. According to Credit Suisse, over 1 Trillion dollars will reset over the next five years. Yet, the Commerce Secretary is saying we've already on our way up from the bottom in housing.

"We knew we were going to have at least one bumpy quarter because of housing," Commerce Secretary Carlos Gutierrez said in an interview from Washington. Still, "this is a resilient economy. We have been able to withstand a correction in the housing market."

And the employment picture might not be so hot either. There are two ways the unemployment numbers can remain low: people are finding jobs or they are dropping out of the figures. Barry Ritholtz believes we are once more in that second territory.

And Nouriel Roubini believes the May 157,000 figure is a bed-time story.

Today instead we are presumed to believe that [157K] jobs were created in May and that employment change in construction was close to zero in spite of the fact that housing starts have fallen over 30% from peak, in spite of the fact that the housing recession is worsening and, in spite of the fact that numerous studies suggest that a good third of all construction jobs are undocumented. Based on the historical correlation between housing starts and construction employment we should be observing now at least 50K job losses per month in construction alone. Add to those the dozens of thousands of workers being fired as about forty sub-prime lenders are closing shop; add to those the dozens of thousands of mortgage brokers, mortgage lenders employees, real estate brokers and agents that are now losing their jobs. Do these job losses appear anywhere in the employment report? Not even the shadow if it: in May the BLS reported that “real estate” related employees in financial institutions were actually up 1.4K? Does anyone believe that?

So why is the stock market doing so well? Perhaps they just aren't believing the facts. As Peter Schiff says the disconnect between fantasy and reality can't go on too much longer.

As a steady stream of bad U.S. economic news accumulates, one wonders when the stock market will finally take notice. After years of highly effective spin coming from Washington and Wall Street, stock investors must re-learn how to recognize bad news, and to stop making lemonade out of every economic lemon that comes their way.


My guess is that Wall Street's blissful slumber may be ended by the shrilling wake-up call of the collapsing dollar. In the last ten weeks the Canadian dollar has risen by over 10% against the greenback. That's about one percent per week - incredible! With the weakness in the U.S. economy becoming increasingly apparent overseas, and global interest rates continuing their ascent, it will not be much longer before foreigners pull the plug on the dollar. When they do, it's the American economy, and Wall Street's phony rally, that will go down the drain.

So while we get rah-rah stories from our business pages and the stock market rallies to the "good news" the dollar is dropping against the Canadian currency.

Soon we will no longer be able to swallow those sweet little economic lies.

Mary :: 1:21 PM :: Comments (5) :: Digg It!