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Posts Tagged ‘economic predictors’
Monday, December 15th, 2008
Messengers have little to fear when delivering good tidings, but no messenger wants to be the bearer of bad news. Yet the fact remains: we are a long way from victory as the scope of the Panic of 2008 emerges in its full gloom. We are in a consumer-led recession, where loss of wealth from eroding home values and plunging 401(k)s leads to loss of both the ability and the willingness to spend. Less spending leads to less employment, which leads to less wealth in a cycle that is beginning to turn vicious. Eventually the cycle will be broken, but that time isn’t now.
One of the key indicators I watch is the Bureau of Labor Statistics’ weekly count of the number of persons filing unemployment insurance claims for the first time. To be eligible for unemployment compensation a person must:
* Have worked during a one-year period.
* Be unemployed through no fault of his or her own.
* Be physically and mentally able to work.
* Be available for work.
* Be actively looking for work.
Over the last five weeks 2,678,000 Americans, an average of 536,000 a week, met these criteria and applied for unemployment benefits. Nothing like this has been seen since the major recession of the early 1980s. From September 1981 through June 1983, weekly initial unemployment claims averaged 543,000. They peaked at 695,000 in October 1982, and never were less than 434,000.
Today, 4,429,000 Americans are collecting unemployment benefits, compared to an average of 2,725,000 over the last 20 years. Looking back again to the early ‘80s, we see that continuing unemployment claims averaged 3,862,000 and topped out at 4,713,000 in November 1982.
Times were different then, and the enemy was rampant inflation. The Federal Reserve and the Treasury moved more slowly and less aggressively. But the message is that bad times are not going away soon. Keep an eye on weekly unemployment claims, released every Thursday morning for an early clue to a turnaround.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line, unemployment rate
Posted in Banking Industry | 2 Comments »
Wednesday, November 12th, 2008
Let’s compare two recent stories from the Home Front.
First, here’s a story, courtesy of The Wall Street Journal. In 2006, Nanci Puerto refinanced her house near San Francisco for $637,288. She and her husband “take home a combined $70,000 a year.” According to the Journal, “Each month, she makes the minimum payment on her loan, $2,416. At the same time, she watches the outstanding principal swell since that payment doesn’t fully cover the interest costs. Now she owes IndyMac $707,000 on a house that the county tax assessor says is only worth $410,000.”
The other story is from The New York Times. Todd Lawrence of Norwich Connecticut “has a traditional 30-year mortgage that he has no trouble paying every month.” Home prices in his area have fallen so much that he now owes more on his home than its market value. “’Why am I being punished for having bought a house I could afford?’ he asked. ‘I am beginning to think I would have rocks in my head if I keep paying my mortgage.’”
Now we’ll do a little math. It takes a monthly payment of $3,820 to fully amortize a loan of $637,288 at 6% interest over 30 years. Just the interest, again at 6%, on $637,288, comes to $3,185 month. And, of course, these amounts do not include real estate taxes and homeowners insurance. The fully amortizing payment is equivalent to about 65% of the Puertos’ take home pay, which is about double the rule of thumb that housing costs should be a third of net household income. No responsible lender would have made Ms Puerto a conventional, fully amortizing mortgage for $637,288. Only an irresponsible lender would have made it.
The efforts that the FDIC, which now owns IndyMac, is making to keep Mr and Mrs Puerto in their home are laudable. Restructuring Ms Puerto’s loan does far more than benefit her family. It helps the local community by saving yet another house from foreclosure, and that, in its small way, benefits the whole country. But our little math exercise cuts both ways, and we shouldn’t automatically picture Ms Puerto purely as a victim of IndyMac. She was also a gambler. She bet that the value of her home would keep appreciating. Then she could keep refinancing at “teaser” rates that would keep the payments low indefinitely. She lost.
But Mr Lawrence lost too, and he didn’t even realize he was playing. The nationwide run-up in home values caused by cheap and easy credit has led to a vicious double-digit devaluation in nearly every part of the United States. Mr Lawrence’s problem underlines an even greater danger than that of the Puertos. Ms Puerto wants to pay, but can’t. Mr Lawrence can pay, but is wondering if he should. Creditworthiness is defined not just as the ability to pay, but also the willingness to pay. Sorting out the mortgage mess must be done fairly, but rigorously. Ms Puerto must be helped without making Mr Lawrence feel like a sucker.
Note: Ms Puerto’s story appears on page 1 of the November 1 Journal in “FDIC Plan Tests Limits of Leniency” by Michael M. Phillips and Ruth Simon. Mr Lawrence’s story is in a page 1 Times story on October 31 called “Mortgage Plan May Aid Many and Irk Others” by David Streitfeld.
Tags: community development, economic predictors, FDIC, financial crisis, foreclosed home, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | 4 Comments »
Friday, October 31st, 2008
The Commerce Department issued its initial and extremely preliminary estimate of third quarter Gross Domestic Product yesterday morning. (GDP is the total output of goods and services produced within a country’s borders.) US GDP dropped at an annual rate of 0.3% during the third quarter. It increased 0.8% on a year-over-year basis. Essentially all of the year-over-year growth can be attributed to the one-off stimulus of tax rebates distributed and (mostly) spent this past summer.
The components of 3rd quarter GDP provide little encouragement for a quick turnaround; in fact, they clearly point to harder times ahead. Personal consumption dropped 3.1%. This is the first outright decline in consumer spending since the fourth quarter of 1991. That’s “positively un-American,” as some office-seekers might say. The 14.1% drop in durable goods—that is, items meant to last at least three years—was the biggest since the first quarter of 1987. But that’s nothing. The 6.4% decline in non-durable goods consumption was the sharpest since the fourth quarter of 1950. Investment in residential structures continued its steep double-digit downward trajectory. The $350 billion (annualized) spent last quarter compares to a peak of $602 billion (annualized) in the fourth quarter of 2005. Investment in business equipment and software accelerated its decline with a 5.5% drop following a 5.0% drop in the 2nd quarter.
Nor did the glow from the few bright spots provide much comfort. Spending on non-residential structures has been robust, and it continued to grow though at a slackening pace. The 7.9% rise was the smallest in almost two years. Exports increased as well, but the strengthening dollar—not to mention global recession—is already creating a slowdown. State and local government spending rose 1.4%, though here again it’s hard to imagine that falling tax revenues won’t force spending cuts soon. Finally, the biggest jump was spending on national defense, up 18.1%. Let’s hope this is one positive economic trend that will not continue.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Friday, October 24th, 2008
When things go wrong, our first impulse is to look around for something or someone to blame. Things are very definitely not going right in the financial world, so we better figure out whom to pin the blame on pronto. Everybody seems to have their favorite boogey man. For a while, it was Fannie Mae and Freddie Mac, but now that they are expected to buy everybody else’s toxic mortgage paper, they are falling out of the running. After all, they can’t be the problem and the solution too. Former Federal Reserve Chairman Alan Greenspan is coming in for his fair share of abuse, and History will be Treasury Secretary Paulson’s judge. Then, there’s that old stand-by “greed and corruption on Wall Street.” This isn’t getting a lot of traction either. Wall Street is where you’re supposed to be greedy, so that part is true enough. But greed is not a synonym for corruption. Large amounts of money always attract some criminal elements, but outright crime is peripheral, not central, to the crisis.
As for me, though, I blame Hollywood. 
Here’s why. The root of our financial problem is nothing more complicated than too much debt. It piled up and up and up, until finally there was one loan too many, and the whole over-burdened mess came crashing down. And why was there too much debt? Or to put it bluntly, why did you and I borrow more than we could afford? Simple; Hollywood made us an offer we couldn’t refuse. Hollywood, the tinsel capital of the world, the symbol of “have it all now,” relentlessly drilled its message into us from earliest childhood to advanced old age. And what was Hollywood’s insidious message? Not, you want this now; not, you need this now; but, you deserve this now.
You deserve this $40,000 car. You deserve this $500,000 house. You deserve this perfect body. You deserve an endless wardrobe of designer clothes. You deserve it all. And the lenders—banks, shadow-banks, finance subsidiaries, credit card companies, mortgage brokers—all got the message and said, “Come borrow from us so you can get what you deserve now.”
Everyone but the most pathological shopaholics fought the Hollywood culture to some extent. As Abraham Lincoln said, “You can fool all of the people some of the time and some of the people all of the time, but you can’t fool all of the people all of the time.” But we all of got fooled enough of the time to keep the debt merry-go-round whirling. There were few ways out. The models for completely rejecting the Hollywood culture led to extreme positions. Some were relatively benign like ultra-fundamentalist religions and backwoods communes, and some were downright crazy like the Unabomber.
But for most of us escape was impossible. Do you want that $40,000 car? Here are the choices. You can save for five years, but by then the car is different and it costs $50,000 any way. Or, you can get about a no-money-down, five-year loan, and drive the car home today. That’s a tough choice? I don’t think so.
During the Great Depression, the movie houses did a great business presenting a fantasy world of escape from hard times. Nowadays, the movies and TV may help cheer us up again. It’s the least they can do, since they got us into this mess in the first place.
(David Oser is the chief economist for ShoreBank. You can read more of David Oser’s insights at http://shorebank.typepad.com/)
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | 4 Comments »
Wednesday, October 1st, 2008
There are no trees in Iceland. Oh, alright, there used to be trees. The Icelanders cut them all down, causing the topsoil to erode, and now they won’t grow back. Still, the Icelanders are fine folks, all 320,000 of them. In 2007, the United Nations Human Development Index ranked the island nation the most developed county in the word. (We ranked 12th.)
That’s interesting (or maybe not), but what does it have to do with the price of tea in China? Well, the financial crisis has not spared Western Europe, and Iceland is looking like the leader of the pack. The Finance Ministry announced today that the country’s economy will shrink next year for the first time since 1992 and the budget deficit will be the biggest since 1994. Inflation is running at 14%, and the value of the Icelandic krona fell 10% versus the euro this week. On September 29th the government bought three-quarters of the country’s third largest bank, which could not get any other funding.
Island hopping to Ireland, we find the government guaranteeing payment on nearly all €400 billion of the country’s bank deposits and other debts. The French, Belgian, and Luxembourgian governments joined hands to stave off a default by the world’s largest lender to local governments, Dexia SA. This followed an earlier injection of €11.2 billion into Fortis by Belgium, the Netherlands, and, once again, plucky little Luxembourg. Fortis is a huge financial services firm that does just about everything for just about everybody. The Brits nationalized a big mortgage lender, Bradford & Bingley PLC, and Germany pumped €35 billion into Hypo Real Estate Holdings AG, the nation’s second biggest commercial property lender. And that’s just this week.
But what about China? A friend of mine has a theory. He thinks the Chinese slowed their purchases of Fannie Mae and Freddie Mac bonds last month not out of fear, but to test our system. China has a much bigger investment in the US, mainly in the form of US Treasury securities, than it does even in tea. The Chinese want to see how resilient we are. But also, they want to flex their financial muscles. China has enough capital to play Warren Buffett’s game many times over. Instead the Chinese are sitting on the sidelines. Perhaps they find it all amusing. A kind of payback for the Opium Wars.
Tags: community development, economic predictors, financial crisis, green banking, Iceland Economy, ShoreBank, triple bottom line
Posted in Banking Industry | 4 Comments »
Friday, September 5th, 2008
Hi, I’m ShoreBank Economist David Oser. In this blog, we’ll be talking every couple of weeks about high finance and low finance. We’ll poke through mounds of dreary economic statistics for glittering nuggets of real information. We’ll visit Wall Street, be the proverbial fly on the wall in corporate board rooms, and, sometimes, stroll down the Main Street in good old Anytown USA.
I’ve been saying “we,” because I hope this blog will become a dialogue with you, dear Readers. I suppose I like talking to myself as much as the next man, but this blo
g space will be a lot more fun (for me, anyway) with a bit of lively repartee. No topics are off-limits, as long as they have at least some tentative connection to economics or finance.
Let’s jump right in with a quick look at personal income and spending. The Bureau of Economic Analysis says that Americans’ personal income was $90 billion less in July than it was in June. A big reason is that the tax rebate train has left the station. The Government doled out $2 billion in April, $48 billion in May, $28 billion in June, and $14 billion in July. That’s $92 billion in all, but that was then. Now we’re back to living on our paychecks again, or, for 3.4 million Americans, unemployment checks.
You may have wondered just how the average family—you know, the one with 2.1 kids and three-quarters of a dog—divides its income. Well, we spend about 10% on what the Government calls “durable goods,” things meant to last three years or more like cars, sofas, and stoves. We spend 30% on non-durables, with about half of that going to food. Most of the rest pays for services, with housing (15%) and medical care (17%) absorbing the majority.
We spend a lot on gasoline too, but maybe not as much as you think. In July, we pumped 4.5% of our income, $51 billion, into our gas tanks. That percentage is more than twice what it was a few years ago, but still below the peak of 5.3% reached in the energy crisis days of the 1970s and ‘80s. And speaking of small favors, the average price of a gallon of regular slumped to $3.90 on July 31 from $4.11 on the 15th. I know it’s hard to remember back that far, but the gallon price broke through $3.50 for the first time ever way back in April of ’08.
Who knows, maybe those glory days will come back.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | 2 Comments »
