Bailouts

Green Shoots Or Just Grass B Green? Industrial Production, Homebuilder Confidence and Uncle Sam's Bad Debt

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It has been more than four years since the Great Credit Unwind became the butt of Saturday Night Live sketches, and yet there is no solid evidence that the economy is recovering.

Making the shoots green.

On the recession-is-ending side, industrial production was up slightly in January, as was capacity utilization, per the Federal Reserve Bank's new release. Manufacturing is down slightly. The quote:

Industrial production edged up 0.1 percent in February following a gain of 0.9 percent in January. Production was likely held down somewhat by winter storms in the Northeast. Manufacturing decreased 0.2 percent in February, with mixed results among its major industries. The output of mines rose 2.0 percent, while the index for utilities rose 0.5 percent. At 101.0 percent of its 2002 average, industrial output in February was 1.7 percent above its year-earlier level. Capacity utilization for total industry moved up 0.2 percentage point to 72.7 percent, a rate 7.9 percentage points below its average from 1972 to 2009.

It's notable that industrial production was actually below the 2002 level for several months in 2009. Notable, but maybe not meaningful if you've become convinced, as I have, that all the net value created in the 21st century has been fake, and that when the economy finds its level it will be someplace back in Bill Clinton's first term or George H.W. Bush's only term.

Meanwhile, the National Association of Home Builders has released its hombebuilder confidence index (not on the NAHB site yet), which shows confidence down two points from the previous month. NAHB reasonably attributes the drop to bad weather:

Builder confidence in the market for newly built, single-family homes fell back two points to 15 in March as poor weather conditions and distressed property sales posed increasing challenges to both builders and buyers, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

"Unusually poor weather conditions certainly had a negative effect on builders' business in February," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. "At the same time, the continual flow of distressed properties priced below the cost of production is having an adverse effect on new-home appraisals and also making it tough for builders' customers to sell their existing homes."

That's some phrase: "continual flow of distressed properties priced below the cost of production." I ain't seeing any way to make money building a house under that equation. And because we have only seen the tip of the straw that broke the groundhog's shadow inventory, that situation doesn't look likely to change this year. There are millions of inevitable foreclosures destined to hit the market, but thanks to feckless banks and government support, this pain will hit the market in a trickle over years rather than a torrent all at once.

It's also notable that the conditions NAHB cited to explain last month's increase in homebuilder confidence—low interest rates and the First Time Home Buyer Tax Credit—are still in place, so that bad weather (which, contrary to the claims of self-absorbed east coasters, did not occur everywhere in the U.S.A.) is being asked to explain a lot.

Finally, there is the looming intervention by the U.S. government's true friends, who just want Washington to admit it has a spending problem. Today, Moody's managing director of sovereign risk Pierre Cailleteau speculated that the United States and the United Kingdom may both lose their AAA ratings.

"We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing," Cailleteau tells Bloomberg. "This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics."

I don't see a whole lot of reason to take Moody's seriously, and I'd expect worries about Uncle Sam's deadbeatery to show up in, for example, 10-year-treasury yield curves. So far, they have not, but there are theories about that.

Still, it's kind of hard to find a downside in a downgrade of government debt, or even the holiest of grails, a default by the federal government. Among other things, this might force more states to take the bankruptcy option, force the United States to sell off assets, reduce the public workforce, and end malignant frivolities like, well, the First Time Home Buyer Tax Credit.

Anyway, it's probably been four years since Saturday Night Live had a funny routine, so maybe it's not really such a long time. But the Civil War was over in four years. You can dog it and still get a college education in four years. I'm sure Mozart or somebody was composing symphonies at four. It's a long time now that the weakness of the U.S. economy has been generally recognized, and history's greatest Keynesian Klown Kar of economic experts has no evidence that it's getting better.

NEXT: Open Thread: Why Did You Leave Cleveland? Or Detroit? Or Pittsburgh? Or...?

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  1. The obsession with the home building market amazes me. People in this country refuse to treat land and homes as a normally priced good subject to the laws of supply and demand. Unless your population is rising or you are artificially reducing the supply of homes, your home prices should not be going up. Moreover, even if your population is rising, the constant supply of new homes being built ought to keep prices stable by absorbing the new demand. Bottom line – there is no reason for home prices to rise above the rate of inflation and anytime they do something if fucked up. Given that, it makes perfect sense that home builders should occasionally see downturns and have to slow the building of houses.

    1. It’s just the latest version of Bryanesque populism and Cross of Gold nonsense.

      There is a large class of net debtors in the US. Their interests are served by continual low-grade inflation, and by increases in the value of certain assets usually acquired using debt.

      Bryan railed against gold and for silver because farmers generally had gone into debt in order to begin production, and if there was general inflation, they would be able to pay off their debts easier.

      In the case of the housing bubble, lots of people went deeply into debt to acquire real estate, and this is an economic home run for them if the price of real estate only goes one way – up. They achieve immense leveraged economic gains over time. This doesn’t work if prices go down, EVER, for even a brief period of time.

      1. In Bryan’s defense, we had deflation in much of the 19th Century which really did unfairly screw farmers.

        Other than that, you are correct.

        1. Notice the halo as well, TS.

        2. I put that on the other thread That is the creepiest photo I have ever seen.

    2. They say that residential investment is a leading indicator, maybe the best indicator.

      Don’t know why that is, as They also say housing represents only 4 percent of GDP. Maybe because it’s related to so many other pieces of the economy, including but not limited to raw materials, labor, retail, transportation, etc.

  2. Well, at least the inevitable default will mean the end of empire, which is good. The only thing that worries me is, if we choose to default by inflation rather than be honest about it, which, of course, we will, we’ll probably face some nasty side effects, like the destruction of all savings and mass hunger. Ah, well; you can’t win ’em all.

    1. We are not going to have mass hunger. Even in Wiemar Germany people didn’t starve.

      1. Wiemar wasn’t run by people who believed they had to stop people from using petroleum and internal combustion engines in order to “save the planet.”

        1. You got something against shivering in the dark, HR?

  3. this pain will hit the market in a trickle over years rather than a torrent all at once.

    The project here is to convert losses in home value into public debt, so that the pain will be felt by everybody, for decades, with interest.

  4. Wait, you mean a house isn’t an investment? It’s an expenditure? What?!? NOOOOOOO

    1. And you mean Flip This House was entertainment, not a business show?

      1. If you buy a house to fix up, then it is an investment. The work that goes into fixing and updating the house gives you a chance to earn a profit.

        If you buy a house to live in, it is an investment since you then do not have to pay rent*.

        * you pay rent to the government as property taxes, but that is hard to avoid.

    2. A house is an investment only if you aren’t going to live in it and plan to make a profit renting it or turning it.

      The home you live in is more like a life insurance policy, in that you can’t take profit out until you don’t need a place to live.

  5. it’s kind of hard to find a downside in a downgrade of government debt, or even the holiest of grails, a default by the federal government.

    really? I don’t think it’s the action itself so much as the timeframe under which the consequences unfold. If you had a default event, or downgrade, that led to rapid reductions in public employment, fire sales of assets…I think the social unrest could be a huge downside. Greece is a small taste…maybe?

    Spread the consequences out over a long time and people grumble to their keyboards but they don;t take up arms?

    1. There is also that little problem of the number of pension funds and insurance companies that own huge amounts treasury debt. That was a breathtakingly stupid and sloppy statement. I guess Hit and Run doesn’t employ editors.

  6. Among other things, this might force more states to take the bankruptcy option, force the United States to sell off assets, reduce the public workforce, and end malignant frivolities like, well, the First Time Home Buyer Tax Credit.

    I predict Congress will print money to bail out the states, nationalize more assets, hire more people, and enact malignant frivolities Right and Left.

    1. +1K

      “malignant frivolities” and then some…

  7. Industrial production edged up 0.1 percent in February following a gain of 0.9 percent in January. Production was likely held down somewhat by winter storms in the Northeast. Manufacturing decreased 0.2 percent in February, with mixed results among its major industries.

    This made my head hurt. Industrial production is not the same thing as manufacturing?

    1. There’s a reason not just anybody could get high on fumes and call themselves the Oracle of Delphi.

      See also: Torx screws.

    2. Industrial production has three sub-components: manufacturing, mining (which includes oil & gas) and utilities. Minng and utility output both rose in Feb while mnufacturing output fell (largely because of auto weakness.)

  8. it’s kind of hard to find a downside in a downgrade of government debt, or even the holiest of grails, a default by the federal government.

  9. Try again:

    Well, other than skyrocketing debt service payments, punitive taxes, the collapse of the currency and financial system, and ensuing economic agony, of course.

    1. These strike me as things that will happen if the government does not default. At least with bankruptcy there’s a realistic chance that the size and scope of government might actually shrink.

      Default is frequently the least-bad option for individuals and companies. Why should it be different for governments?

      1. These strike me as things that will happen if the government does not default.

        Well, up until the bit about the currency and financial system collapsing and ensuing economic agony, I think you’re right.

        But the government isn’t going to go straight from its current state into default. Its going to default when the currency collapsing, etc. is better than what it has to do to make the debt payments.

        1. He that steals my purse steals trash. Don’t you think you could switch to non-dollar transactions pretty quickly? You’re a man of the world, with plenty of hard assets and land and so forth.

          These things are not as apocalyptic as people pretend.

          That having been said, the U.S. is a long, long way from default.

          1. It might be a long way from it, but our government is pouring on the coal.

    1. What the hell happened to my comment? Here’s what I tried to post:
      Anyway, it’s probably been four years since Saturday Night Live had a funny routine, so maybe it’s not really such a long time. But the Civil War was over in four years. You can dog it and still get a college education in four years. I’m sure Mozart or somebody was composing symphonies at four.

      Perl Harbor to VJ Day was less than four years.

  10. Gosh, hatin’ on SNL, that’s a tough row to hoe.

    You know, if you never watch SNL, then how do you know if they have a funny sketch?

    I know, I know, it just hasn’t been the same since Ackroyd/Chase/Murphy/Hartman/Carvey/Myers/Ferrell left.

  11. if you’ve become convinced, as I have, that all the net value created in the 21st century has been fake, and that when the economy finds its level it will be someplace back in Bill Clinton’s first term or George H.W. Bush’s only term.

    I somehow don’t buy that. You do have some clue what computers have accomplished over the last decade? Not to mention the kinds of electronics that are available today, that weren’t a decade ago — very probably because, computer manufacturing has made other types of electronics manufacturing more cost effective.

    Yeah, we had a bubble. Yeah, the government has consumed a major chunk (maybe even all) of the economic gains over the last decade, and people just don’t now it yet.

    But saying our growth over the last decade is an illusion, is really going too far.

    1. Depends on the sector, do it not? I’d say real estate is on a wayback journey to the nineties.

      There are plausible reasons to believe industrial production should be experiencing extensive shrinkage — which would be even more pronounced if GM and Chrysler weren’t on life support.

      Many parts of transportation are still in a dislocation phase, with the big airlines all going out of business at different speeds.

      For that matter, every kind of media and information industry is closer to the beginning of the dislocation than to the end, thanks to these “computers” you speak of.

      I understand that by the third quarter of this year we’ll all have newer, better jobs tweeting fulltime and trading iPhone apps, but until then, it’s pain all the way, baby!

      You know, there is this part of creative destruction that’s called destruction.

      1. Also, I did say that I have “become convinced,” not that I have a working model that I would put up for peer review. (Even though my peers are mostly ignorant journos and artsyfartsy types who wouldn’t know any better.)

        1. Hmmm.

          Okay. Some market segments like real estate were illusion. Others like transportation are messed up because everybody’s got money problems. Though the major airlines have been trying to put themselves out of business for a long time (my opinion).

          In the big corporations (where I live), a significant part of the money problem has amounted to getting pension funds brought back up to where they should be, now that the market is — adjusting itself.

          But in private industry this has largely been done. Business still isn’t great, but the really big cash crunch has started easing. You still hear about layoffs but the big wave (for those of us who are “professionals”, not hourly types) seems to have passed. I even know a few people who are starting to find new jobs.

          Meanwhile, I see a huge ramp-up in company overhead costs over the past 5+ years, largely going to pay for compliance with new government regulations. I’m in a position where I evaluate bids from lots of companies and I’d say overhead rates are up, across the board.

          This added cost of compliance has definitely slowed things down.

          OTOH, there really are lots of things we can do faster-better-cheaper today, and things we can buy off the shelf today that were custom order, compared to five years ago. Hell, compared to even three years ago. And it’s largely due to advances in computers and software.

          These aren’t the kinds of changes that put people out of work, they’re the kind that increase demand for technology people.

          But I’m an engineer and maybe that’s my problem. In spite of the down turn, I don’t see very many people with genuine skills sitting around without work. And I see definite productivity improvements that have occurred.

          I guess in my mind, “productivity advances” and “economic growth” go more or less hand in hand. This real estate disaster has largely been off in some other universe, to me. Other than the fact that I’d be terrified at the prospect of having to sell my house if I did get laid off.

          So I don’t think it’s fair to say there’s been no growth over the last decade. But there’s been a lot of castle-in-the-air building, combined with definite increases in cost of complying with government regulations.

          Increasing compliance costs always have the end result of requiring that companies market products with higher margins. Note that increasing price to the end customer is only part of this story. This I associate with economic contraction, because we aren’t making/doing/selling things that we otherwise would have been.

          You may also note that in today’s world, I attribute the above to the reason that we buy more and more stuff from China. We can’t afford to make it here anymore.

          So the question (still my opinion) is, have productivity advances stayed ahead of government growth? Historically in the US, somehow they usually do. This time? I’m not sure yet…..but my gut tells me that if Uncle Sam could avoid destroying the currency, in the big picture (and not so far off in the future) we’d be doing fine.

          So the picture is clear as mud.

        2. not that I have a working model that I would put up for peer review

          +10

          If you did, I’d be disappointed in you.

          As an engineer who’s derived more equations from scratch for my students than I can remember (back when I used to teach) I’m an utter dis-believer in mathematical models of the economy.

          Looking at numbers and stats and comparing the present to past history, that’s one thing. It makes sense to do that. And we may learn general lessons from playing with attempts to model the economy in a general sense.

          Claiming that you can write a differential equation (or any other type) that’s going to predict what’s happening right now, is the mathematical equivalent of voodoo. Claiming that one can predict the future economy with math — outside some very simple and limited circumstances — is worse yet.

          I know all about mathematical approximations, but there is still a minimum level of quantification required if an equation is to have any validity. “The economy” utterly defies the precision that mathematical definition demands.

          “It is the mark of a wise man that he does not expect more certainty of a subject, than it naturally admits of.” — Aristotle

          1. Claiming that you can write a differential equation (or any other type) that’s going to predict what’s happening right now, is the mathematical equivalent of voodoo. Claiming that one can predict the future economy with math — outside some very simple and limited circumstances — is worse yet.

            Unless you control human beings and their behavior very rigidly, these economic models are not even going to come close to reality.

            When the Obama Admn made the initial prediction that the stimulus would help reduce unemployment I am pretty sure they plugged in their rosy projections into these fancy models and came up with the magic number of 8%.

            We all know how THAT worked.

  12. Does the Community Reinvestment Act still exist? If so, Congress is not yet interested in turning things around.

  13. Is home ownership compatible with America’s need for a mobile workforce?

    If workers — who are parasites feeding off the hero business executives — are expected to “go where the jobs are,” why do we want them anchored to a house and mortgage?

  14. “It has been more than four years since the Great Credit Unwind became the butt of Saturday Night Live sketches,…”

    Funny how that skit (the Don’t Buy Stuff if you Don’t Have the Money skit) will never be made during the Obama administration.

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