The Economy Recovery: Maybe or Maybe Not

Many economists believe the U.S. economy is recovering from the deepest depression since the Great Depression. In sprite of the economist’s opinion, one must wonder if the economy recovery is real, or a simple head fake. In this article we’ll take a look at some hard facts.

The U.S. Economy

The Conference Board recently report the customer confidence index fell to 46.0 in February 2010, down from 55.9 in January.

The Labor Department reported jobless claims jumped the last week in February much higher than expected.

The Commerce Department report the first revision of the GDP for the 4th quarter rose to 5.9%. Good news except that inventory restocking made up 3.9% of the growth. This means that factors like consumer spending advanced far less.. The bad news is that consumer demand is not fueling growth. The evidence of this analysis will be evident in the coming quarter.

The Mortgage Bankers’ Association purchase index fell -7.3% to it lowest level since 1997. This index is a measure of applications through mortgage lenders and is considered an indicator of the strength of the housing market. The decline is a signal of housing market weakness.

The Commerce Department reported that new home sales declined -11.0% in January. This compounds December’s bad news when new home sales fell -7.6%.

The S&P Case-Schiller Price Index fell -3.1% compared to one year earlier. This dims hopes for a recovery in housing prices.

The commercial mortgage default rate jumped to 3.8% in the 4th quarter according to Real Capital Analytics, Inc. The default rate has more than doubled over the past year.

The FDIC reported that bank lending declined last year to the lowest level since 1942. This suggests that bank failures will rise in 2010. In 2009, 140 banks failed. Some 702 banks are at risk.

The National Association of Realtors reported that existing home sales fell -7.2% in January, following December’s drop of -16.7%.

The Commerce Department released the reading on the import/export prices. Import prices rose by 1.4% in January signaling that inflation may be picking up. This is up 11.5% from a year ago. Export prices also rose by 1.4% in January. The offsetting increases indicate a low growth in GDP.

Around the World

Japan, with $768.8 in U.S. securities is now the largest U.S. debt holder according to the Treasury Department. China was the largest, but after selling off $34 billion now holds around $755.4 billion in U.S. Treasuries.

The Office for National Statistics reported that jobless claims in the U,K. rose to 1.64 million in January, the highest level since 1997.

Greek labor unions held a second 24 hour strike to protest the governments’ budget cuts. The budget cuts represent efforts to reduce the deficit from 12.7% of GDP to a level acceptable to the European Union, and will result in salary freezes and bonus cuts.

Bank Rossii, Russia’s central bank, reduced its benchmark refinancing rate by .25% to 8.5% (a record low). The rate cut represents the central bank’s efforts to promote lending.

The Magyar Nemzeti Bank of Hungary is expected to lower its key interest rate to 5.75% (the lowest level since the fall of communism), according to a Bloomberg survey of economists. The rate cut is an attempt to stimulate economic growth.

Housing

Housing starts were up in January which would be good news if it weren’t for the glut of unsold homes already on the market. And if there wasn’t a shadow inventory of houses waiting to coming on the market.

While housing starts are increasing, new homes sales are down 7.6% in December. Recently RealtyTrac estimated that foreclosures will reach 4.5 million this year topping last year’s 2.82 million. And the Congressional Oversight Panel expects an additional 8 million to 13 million foreclosures over the next five years. New homes will sit unsold as the existing home market is cleared up, which won’t happen any time soon with the shadow inventory of homes nearing foreclosure entering the market.

The other problem: the government’s Home Affordable Modification Program simply isn’t working. Marking one year since its inception, the program has temporarily modified over 1 million mortgages, but permanently modified loans for only 116,297 homeowners, according to the Treasury Department. This is well below the program’s target of assisting up to 4 million troubled borrowers. The other problem with this program: for many homeowners, it is not enough. Many in the program still can’t make a mortgage payment (one third of homeowners in the program are delinquent). Ultimately, the program is delaying foreclosures, not preventing them.

With an increasing inventory of unsold homes, prices have one way to go: down. However, housing prices are still historically high, after adjusting for inflation.

Jobs

According to the Bureau of Labor Statistics, in December 43 states and the District of Columbia recorded unemployment rate increases. Until the unemployment starts a downward trend, an economy recovery is not possible.

Representative Debbie Wasserman Schultz, (D-20th District FL) in a recent newsletter to her constituents said the American Recovery and Reinvestment Act (stimulus) had created 112,000 jobs in FL. Florida received about $11.8 billion in stimulus funds which translates into paying about $105,500 to create each job. This cash outflow is not sustainable.

Florida's unemployment rate increased to 11.8 percent, the highest rate since May of 1975 reports the Agency for Workforce Innovation..

And things aren't looking brighter in the short term for Florida, Legislative economist Amy Baker predicted that Florida will lag behind the rest of the nation in recovering from the latest recession largely because of the state's housing surplus where there are more than a half million homes in foreclosure. Baker said Florida's unemployment will likely peak at 12 percent later this year.

Recovery?

A recovery may or may not be in our immediate future. Regardless, whatever the structure or timing of the recovery, many families will not detect a change in their own circumstances. So many jobs have been lost that the unemployment rate will remain high when and if the economy begins to rebound. Large numbers of still jobless Americans have exhausted their severance payments and unemployment benefits, keeping them under great strain even if the overall economy picks up. With a depleted saving backup, there is simply no room for slippage for many Americans.

This material was researched and written by David Snellen. © 2010 USA Living.com, Inc.