“Mirror, mirror on the wall. Who’s to say the economy has stopped its fall?”
“The NBER, dummy!”
The National Bureau of Economic Research (NBER) is a private, nonprofit organization. Begun in 1920, it has focused on collecting and analyzing economic data on the U.S. economy. It is nonpartisan. Sixteen of the past 31 American economists who have received the Nobel Prize have been members of the NBER. It is noted by the precision of its research and the uniquely boring style of its publications. As young assistant professors learn early in their careers, nobody ever gets fired for quoting an NBER publication . . . or promoted.
The NBER somehow is universally regarded as having the final say about when a recession begins and ends in the United Stares. This is not to say that other organizations slavishly adhere to the NBER’s assessments. But, as far as textbook accounts of when a recession begins and ends, they conform to the NBER’s assessments.
There is an NBER committee that makes this assessment: the Business Cycle Dating Committee. It meets infrequently. From July 2003 until January 2008, there were no meetings. In December 2008 there was another meeting. The committee announced that a recession had begun in December 2007. This, you may recall, was after the U.S. government had nationalized the mortgage market (September), followed by the bankruptcy of Lehman Brothers and the conversion of the major investment banks to commercial banks that were eligible for TARP bailout money (October). You couldn’t fool the committee! A recession was in progress.
The committee had its first meeting since December 2008 on April 8, 2010. It did not announce the end of the recession that began in December 2007. It released this statement.
The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.
This press release is representative of the style of NBER publications. Wise people do not read NBER publications while smoking in bed.
Translating from official NBER prose, this document reveals what most people except stock market investors already know: the economic recovery is weak at best and non-existent at worst. The December 2007 date was a good indication of when the recession began. There are insufficient unambiguous data available to indicate when the trough occurred.
At the next meeting, held perhaps a year from now, the committee may decide that the trough took place in the spring of 2009. Or it may identify another period. Or it may again refuse to identify any end. But the fact that the committee refused to commit at the April 8 meeting is additional evidence that experts among business cycle economists are not impressed with the extent of the recovery.
“SELL IN MAY AND GO AWAY”
This familiar slogan refers to stock market investing. The summer is usually a good time to be out of the market.
Home sellers do not sell in May and go away. They list in May and begin to pray. They wait for June to bring Prince Charming. Then July. In early August, they begin to panic. They have had no visitors. That is when price-cutting begins in earnest.
This year, price cutting may begin in July.
The Federal Reserve has ceased to purchase the bonds of Fannie Mae and Freddie Mac. Mortgage rates have begun creeping up. This may lead to home purchases in the next few weeks, because the tax credit expires on April 30. Borrowers who want to take advantage of the tax credit must sign the papers by April 30. They also want to get their loans at a low rate.
What happens if rates continue to climb, as expected, and the tax credit law is not renewed again, also as expected? The overhang of as many as 7 million houses scheduled for foreclosure is the sword of Damocles over the residential real estate market.
Robert Shiller, whose name is on the Case-Shiller index of home prices, said on April 1 that he thinks there is a 50-50 chance that the housing market will go into reverse. This is rare, he said.
We saw home prices decline between 2006 and 2009 — three years of decline. And now that [the market is trending] up, you know, it’s perfectly plausible to think we’ll have three years or more of increases. But I’m not so sure. We don’t know how much of this is transitory because of the government support. We’re in such an unusual economy now that [a double dip] has substantial probability.
He understands that at least 80% of the U.S. housing market is supported by the U.S. government. It may be as high as 90%. “Really almost the whole market now is government. And we know this can’t last.” Prices are artificially inflated.
He thinks we need another Federal stimulus. These days, what Keynesian doesn’t? They think that the Federal Government is able to stimulate aggregate consumer demand by increasing its spending, despite that fact that the government must pull the money it spends from the public, either through taxes or borrowing. The only other option is the Federal Reserve: fiat money.
As for the Federal Reserve, Shiller thinks it should have more regulatory power.
I think the Fed should have a lot of regulatory power. The central banking tradition is really one of understanding market psychology. It’s part of what central bankers do…so that’s the organization that should be in charge of systemic risk management.
In short, he is typical of academic economists everywhere. He sees government spending and central banking as the twin pillars of economic recovery. The trouble is, from the economists’ point of view, millions of voters are beginning to figure out that the government and the FED are the problem, not the solution. Shiller has described the new mood of a growing minority of voters.
One thing George Akerlof and I talk about in our book, Animal Spirits, is that the economy is driven by stories. And there’s a story at any point in time that colors people’s thinking. Right now the story is one of anger, frustration, and disillusionment — mistrust. The Tea Party movement is one result of that. And that is potentially holding back the economy.
The public has caught onto the fact that the Federal government and the Federal Reserve System have, in the immortal words of astronaut Gus Grissom, screwed the pooch. The economy is still weak, unemployment remains high, businesses are not hiring, commercial banks are not lending, the crash in commercial real estate is accelerating, the Option ARM and Alt-A mortgages re-sets are beginning their two-year acceleration. Meanwhile, politicians are not cutting taxes or cutting the deficit. They are raising both.
Now the Federal Reserve and the Federal government are pulling the plug on the housing market subsidies. Foreclosure rates are about to climb. Housing had been an engine of growth, debt, and widespread optimism until early 2007. Housing was widely regarded as the engine of the recovery out of the 2001 recession. It no longer is.
In January, about 29% of all U.S. home sales were distressed sales. This is going to rise. This is because short sales will increase. So will foreclosures. This means that the number of non-distressed sales will have to rise sharply in order to keep the distressed-sales figure at 30%. But the government has ended the subsidies.
Economist John Lounsbury has estimated that if distressed sales increase to 35% in 2010, this could sharply reduce home prices. The price discount on distressed homes three years ago was 45%. Last year, it was 20%. It is now averaging over 30%: past 12 months. Because of the increase in distressed sales coupled with an increase in discounting, he thinks that an overall housing price drop of 30% is possible this year.
I am not this pessimistic. I think 15% is more likely, January to December. But there is nothing I see on the horizon that will keep this from repeating in 2011.
The grinding reduction in household equity that began in 2007 is going to continue in 2010 and 2011. The average American family’s main source of equity has been its home. This investment is now producing losses. As this process continues, middle-class Americans will finally abandon hope in a reversal in this decline. They will hope for the stabilization of the housing markets. They will hope only not to lose any more capital.
The housing market for the rich is worse than the housing markets of the middle class. There are fewer buyers. Jumbo loans are more expensive to finance and fewer people are qualifying for them. Buyers know this is a buyers’ market. They are holding out for lower prices. They do not have to move up. They can wait for prices to move down. At some point, present owners will move out.
When the academic experts in recessions and recoveries postpone a decision to announce the end of the recession, the economy is weak.
When the engine of recovery — residential real estate — is headed for rising mortgage rates, rising foreclosures, and the end of the tax credit, the recovery looks less sustainable.
When Keynesian economists call for another stimulus, the traditional Keynesian policy is failing to deliver the goods.
The public is catching on to the games Congress plays. This will increase over the summer.
A political earthquake has begun. We have felt a few tremors. I think a major quake will hit in November. This is all to the good politically. But it does not solve the problem of the faltering recovery.