Whose Numbers Are We to Believe?

January 29, 2010 by E.L. Beck

Household wealth

On December 9th, Zillow.com reported that homeowners have lost about $5.9 trillion in value since the market’s peak in March, 2006. Most of a household’s wealth is tied up in its home.

On December 10th, the Federal Reserve’s Flow of Funds reported that household wealth in the U.S. increased by $2.67 trillion in the third quarter (of 2009 – ed.) as stock prices and home values climbed.

Retail sales

On December 4th, retail chains were reporting a lackluster holiday season. “Sales at stores that sell groceries were also hurt by lower food prices,” according to this New York Times article. The story went on to report, “Sales at Target, the most upscale of the discount chains, decreased 1.5 percent. (Wal-Mart, the behemoth discounter and the nation’s largest retail chain, no longer reports monthly same-store sales.)”

Yet, eight days later, a Times headline beaconed the news, “Retail Data Shows Strong Start to Holiday Season,” using a Commerce Department’s report. “Economists explained the discrepancy by noting the government’s report measures a wider slice of the economy,” the report went on to state, “including grocery stores and discounters like Wal-Mart.” Yet, as the above quote mentioned in the earlier article, Wal-Mart doesn’t report monthly results, and grocery stores has been hurt by lower food prices. So how did Wal-Mart’s results suddenly materialize and why did grocery store sales suddenly helped the figures?

Home sales

The S&P/Case-Shiller home-price index reported a 0.2 percent increase in November.

Yet, sales of existing homes slumped 17 percent in December (the biggest drop since records started in 1968), while new homes dropped 7.6 percent. And since the drop in sales outpaced the drop in the inventory of homes, the supply of new homes increased from 7.6 months to 8.1 months. For all of 2009, sales dropped 23 percent to 374,000, the lowest level since records began in 1963.

A record 3 million homes went into foreclosure in 2009. Rising foreclosures and unemployment figures are at a 26-year high.

Month-to-month seesaw

In November, housing starts were reported to have plunged 11 percent in October. In November, housing starts rose 8.9 percent.

Building permits dropped to an annual pace of 552,000 in October, down from an annual pace of 575,000 in September. Building permits increaed to a 584,000 pace in November.

Confused?

I know I am.

Certainly some of the pundits will wag their fingers at me, and lecture about how I am comparing apples-to-oranges in some instances. And I am.

In other cases, I’ll be accused of following the month-to-month results too closely, as figures are too volatile to follow in the short term. And I am.

I’ll also be accused of creating correlations where none exist. And I do.

Yet, all of these data are reported on a monthly basis, and emblazoned into headlines. Readers will respond positively or negatively to the daily headlines.

And for those who follow the trends over the long haul, none of this clarifies matters in terms of where the economy is heading for the long term, so turn off the predictions.

The data are only as good as the assumptions that go into them. This is the bane of probabilities and statistics. For instance, why does household wealth include the value of the home? Most households do not own their home… the banks own it until the day that mortgage is paid off, and precious few households ever reach that day.

And assumptions can be massaged to help or hinder numbers. Sometimes that massaging will take place at the government level, always ready to put a positive spin on the latest figures. Re-election fortunes depend on it. Other times that massaging will take place at the news media level, where headlines will pull one small slice of positive news out of a report, and bury the bad news in the middle of the story. Just look at the retail sales stories.

Although I do not know what assumptions go into the S&P/Case-Shiller home-price index, there is something terribly amiss in the index calculations when record lows are being reached in terms of new home sales, existing home sales, and foreclosures, yet home values are rising.

In terms of housing starts and building permits, the levels have been fluctuating greatly in recent months, so why not report on a quarterly basis? While some will complain investors need regular guidance from various industries or they will be flying blind, I contend they are already flying blind.

The almighty numbers

In a society enamored with numbers (far more so than our peers in Europe), bringing them into their rightful perspective will be difficult. But let’s face this fact for now: With the looming precipitous rise in foreclosures, this ride down isn’t over. And until I see how the banks are going to intelligently deal with this problem, all other numbers are meaningless.

Hold on to your numbers.

Addendum: The Commerce Department later released its Growth Domestic Product report, weighing in with a seemingly whopping 5.7% growth rate in the fourth quarter of 2009. Hidden in that number: The growth largely arrived on the back of replenishing depleted inventories, and much of the buying dependent on stimulus funding. The reporter for this Bloomberg News story offered no penetrating analysis along this line.

Addendum, 2010-02-05: The Federal government has made some very significant revisions to its unemployment numbers today, this from an article in The New York Times:

“In its report, the government revised its job loss numbers for November, saying the economy gained 64,000 in that month rather than 4,000. But the numbers in December were much worse than previously stated; the economy lost 150,000 jobs rather than the 85,000 originally reported.

“The overall toll of the recession, meanwhile, grew larger: 8.4 million jobs have been lost since December 2007, the government said, nearly one million more than previously recorded. Those numbers jumped significantly from December because the Labor Department on Friday said it had completed a benchmark revision of job losses since April 2008. Job losses in August, September and October of last year were 240,000 worse than original forecasts.

“Economists said the declining unemployment rate was probably a statistical quirk and did not indicate the start of a downward trend. The unemployment rate is determined based on interviews with a random sample of Americans, and its results can be erratic.” (emphasis added – ed.)

The paragraphs above were numbers 5, 6, and 7 in the story, buried in the middle. The Federal government can frequently revise numbers and squeak by with the shoddy results because subsequent media coverage always buries “stale” updates, thus the information flies below the radar.

The Aristocracy of Monied Corporations

January 28, 2010 by E.L. Beck

Last Thursday, a divided Supreme Court ruled 5-4 that the government may not ban political spending by citizens or “associations of citizens” during election campaigns.

The decision revolved around Citizens United’s production of a documentary covering Hillary Clinton in a less-than-flattering light. This group lost a lawsuit against the Federal Election Commission, as the commission ruled the documentary was subject to the stipulations in the McCain-Feingold Act.

The case was first argued in March, 2009, and it appeared the court would rule on a narrow basis, such as declaring Citizens United not qualifying under the bans set by the McCain-Feingold Act.

However, the court took an unusual step in hearing a second argument in September, 2009, as to whether Austin v. Michigan Chamber of Commerce (1990) and McConnell v. Federal Election Commission (2003) could be overruled. Both of these decisions upheld restrictions on corporate and labor union spending in support of, or opposition to, political candidates or campaign spending in general. In last Thursday’s ruling, the court essentially overruled these cases.

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A Lull

January 28, 2010 by E.L. Beck

I have been absent from active posting to my blog, as over the past months (the last two in particular) I have been engaged over my sister’s last days in her battle with breast cancer. She passed away earlier this month.

This is to her memory.

“Running Out of Steam”

December 3, 2009 by E.L. Beck

It’s always encouraging to see that Wall Street readily bails on the U.S. when it sees the domestic U.S. economic recovery faltering, running to China in its stead, looking for the next-big-thing (ignoring the fact that China’s exports to the U.S. will remain weak as long as the U.S. economy remains weak, and also ignoring the fact that China’s economy was not built around robust domestic demand).

A Green Economy?

December 3, 2009 by E.L. Beck

Well, business and government leaders are milling around DC for the employment summit, posturing for the cameras and attempting to draft some missive from on high that will wave the magic wand and create jobs. Of course, it would help if they dirtied their Gucci loafers and actually circulated in the real economy to get a handle on how bad things really are, but that’s far too pragmatic for those whose thinking follows a priori mode: Create plans based on theoretical deductions, rather than empirical evidence, now and say “D’oh!” later.

The summit calls to mind Obama repeatedly talking up the formation of a green economy as the way to create jobs for the future. It sounds ideal, with job growth fueled by technologies that will lead us out of foreign-energy and fossil-fuel dependence. And Obama is still beating that drum.

But there’s one problem: Why does the Obama administration believe this research or manufacturing will be the sole province of the U.S.? Simply because some of the technologies may be developed here? What is stopping such jobs from migrating oversees once production is underway, like much of our manufacturing capacity? Or why is it assumed the U.S. is the only country capable of the research necessary to advance such technologies? Our meager levels of research and development spending is hardly an encouraging sign.

This New York Times report solidifies the above contentions: Taiwan Semiconductor will pursue the manufacture of solar panels. Another report states the Chinese are well on their way to surpassing U.S. solar panel production, forging ahead so hard they have succeeded in pushing the price of panels down by half.

What will likely unfold in terms of a green economy? A “green economy” will only become a partial realization in the U.S., just as the “service economy” and “technology economy” became partial realizations.  The latest buzz words for a utopian economy may change, but their inability to address real problems remain intact. What is called for is thinking based on reality.

What is called for are leaders who own a pair of chore boots, not Gucci loafers.

Banks Need to Become Landlords (Reprised)

November 10, 2009 by E.L. Beck

This past weekend I had a sense of déjà vu when I read that Fannie Mae would allow borrowers to lease homes. From my original independent website (now defunct), here is my post from December 9, 2008:

The recent actions by the Federal Government to create economic stimulus has been disheartening to watch, as many of these same measures were already enacted – and largely failed – in Japan during the 1990s. Yet, these measures are attempting to increase consumer debt loads and will create huge future tax liabilities on Americans thanks to increases in Federal government spending, which will only prolong the economic misery of households…. Read the rest of this entry »

The Chasm Between the Economy And Finance (essay)

November 5, 2009 by E.L. Beck

Today I post a new essay, The Chasm Between the Economy and Finance, a look at the world of finance and how it has increasingly divorced itself from our economy… and reality:

Is Finance Losing Touch with Reality?

Introduction

The Growth of Finance

In the October 30, 2009 edition of The New York Times, Floyd Norris argued that rather than attempt to regulate the salaries of Wall Street bankers, it would be better to regulate the root cause of those massive paychecks: the enormous amounts of money flowing through Wall Street. In Norris’ column, he noted that during the 60 years from 1929 to 1988, financial industry profits averaged 1.2% of our Gross Domestic Product (GDP), and never above 1.7%. All that changed in the last decade of the 20th century, and continues unabated: by 2005, financial industry profits as a percentage of GDP rose to 3.3%, and remains higher than at any time during those six decades mentioned.

Few should begrudge profits. After all, profits are what attracts individuals to start and manage businesses in a system where the risk of failure is always present. But somewhere along the line, profits became a God-given right in the eyes of management and investors, rather than as a reward for a job well done. And companies work within an economy, not in isolation, and must manage themselves through economic cycles without ignoring the economy at large, profits at all costs, and accounting chicanery.

To read more, click here, or see the essay listed under “Pages” at the right.

Mortgage Mods Rolling out of Hoopla Machine

October 12, 2009 by E.L. Beck

The Treasury Department recently cranked up the hoopla machine by announcing that over 500,000 homeowners have begun a trial modification under the Treasury’s $50 billion mortgage modification program.

“Wow,” I thought to myself as I fought back the tears, “over a half million mortgage holders will find sunshine in their otherwise abysmal life as a homeowner.”

Not so fast. That purvey of wet Snuggies, (or “Slankets,” if you prefer the 30 Rock version), the Congressional Oversight Panel (or “COP,” as it is derisively known in the halls of that hotbed of rebel Congressional activity, the Rayburn Building), quickly read me the riot act, full of interminable warnings about that half-million number.

This COP had the audacity to point out to me that the mortgage mods are merely “trials,” and that the ultimate success of the program will be the number of foreclosures actually prevented. That figures. Leave it to the cynical worldview of a COP to suspect that even the bluebird of paradise is capable of the most heinous of crimes.
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Two Ills; One Remedy

October 8, 2009 by E.L. Beck

The Reverend Thomas Robert Malthus (1766 – 1834) was a British minister and scholar whose works spanned many disciplines. One of his most important books, Essay on the Principle of Population, or a View of its Past and Present Effects on Human Happiness, laid out Malthus’ argument that population growth is geometric or exponential, while the growth of the food supply is arithmetic. Of course, exponential or geometric growth climbs at a faster rate than arithmetic growth.

In short, Malthus thought humankind was heading for a catastrophe.

Malthus felt mere subsistence limited population growth; if the quality of the means rose for those living at a subsistence level, then a population increases. This initiates a cycle of an increasing quality of life that raises population levels. However, since population levels quickly outgrow the pace of food production, severe measures must be taken to keep population growth under control. Malthus believed reason played a major role in deciding if procreation was a risk. This reasoning would grow, per Malthus, as the quality of life fell to meager subsistence levels; the decline occurs as population growth outstrips the capacity of a nation to support its population. Malthus felt any intervention into this cycle would only delay the inevitable.

Subsequent history has shown that population growth is as likely, or more likely, to increase as the quality of life decreases to subsistence levels. This, however, is not the same as a population facing real food shortages, which is what Malthus discussed. Read the rest of this entry »

Gov’t and Economic Interests as Bedfellows

October 1, 2009 by E.L. Beck

Recently there have been a number of observers from all corners of the political spectrum increasingly worried about the growing collusion between Washington, DC and the powerful economic interests in our country. The discourse on this issue reminds me of the “governmental support” German economist Wilhelm Röpke spoke of in A Humane Economy: “The market and power do not go well together, and anyone who wished to use his strong position vis-à-vis some buyer or seller to establish a dominating relationship of more than transitory duration would find it difficult to do so unless he could count on governmental support.”

One observer worried that we are inching towards Ayn Rand’s nightmarish vision in Atlas Shrugged, wherein the government takes over the economy. I reject that comparison, as Rand’s novel framed business as an unwilling partner in her economic coup d’état; in the present circumstances, big business is an all-too-willing partner, despite their occasional bluster to the contrary.

The reporters Cho, Mufson and Tse, in their Washington Post article, “In Shift, Wall Street Goes to Washington,” noted:

Washington has become a dominant player. Over the past year, the Federal Reserve and the Treasury have injected trillions of dollars into frozen financial markets, snapping up unwanted bonds, extending guarantees to banks and slashing interest rates.

Three times as much U.S. taxpayer money has gone into propping up a single firm, insurance giant American International Group, as the world spent a decade ago during the financial rescue of South Korea, then the world’s 11th-largest economy. And the emergency bailout of financial firms that Congress approved last year has cost nearly as much as the first five years of the war in Iraq.

Now the Treasury and the Federal Reserve are embroiled in everything from credit cards and home loans to auto manufacturing, from overseeing executive pay to shaping boards of directors.

In response, senior executives of major financial companies are traversing the Beltway to meet lawmakers in person for the first time. Firms such as Fidelity Investments, BNY Mellon and even Goldman Sachs, which has prospered in the crisis relative to many other banks, are opening additional offices or bulking up their staffs in the capital…. Read the rest of this entry »