Those who were caught off guard by the August-September correction ignored a deluge of fundamental, technical and economic data. (See August’s Market Top: 15 Warning Signs.) Median U.S. stock valuations had surpassed 2000 and 2007. Technical deterioration in market breadth virtually guaranteed a precipitous drop in the benchmarks. And the “decoupled-from-the-rest-of-the-world” U.S. economy? Feeble wage growth, waning , stalling retail sales, revenue contraction at U.S. businesses and a free-fall in U.S. manufacturing challenged the notion that the domestic economy’s foundation remained solid. (See September’s 13 Economic Charts That Wall Street Doesn’t Want You To See.)
In spite of unambiguous evidence, naysayers continued to tout the positives. They’d insist that the consumer – who accounts for roughly 70% of U.S. economic output – is vigorous. They’d chat up housing price gains, new home sales and homebuilder confidence. Perhaps most notably, they’d point to the 5.1% as “Exhibit A” in a robust rebound.
In recent commentary, I challenged the idea that consumption is as resilient as the media portray. For one thing, the Conference Board’s Consumer Sentiment Survey sits at its lowest point of 2015, with the Future Expectations sub-index declining at a faster clip than the Current Situation sub-index. For another, wage growth at its slowest year-over-year rate since 1982, forcing middle class Americans to hope that gas prices and interest rates both remain lower for longer. Unfortunately, the Federal Reserve seems hell-bent on raising borrowing costs before ultimately lowering them in the near future, if only to declare a hollow victory.
I could spend a great deal of time debunking the idea that the consumer can afford to be as active going forward as he/she had been earlier in the recovery. Instead, I will let the current retail data do the heavy lifting.
“Well, Gary,” some have written to me (and I am paraphrasing here). “You’ve done a remarkable job highlighting global stagnation and domestic sluggishness. But you must acknowledge that housing is in spectacular shape and that 5.1% unemployment is wonderful.” I wish that I could acknowledge those things. I really do.
Let’s start with the real estate ruse. Surging prices on property values reflect the same thing that record high stock prices reflect; that is, $7.5 trillion in federal government spending coupled with $3.5 trillion in U.S. Federal Reserve quantitative easing as well as seven years of zero-bound rate policy reflated the prices of key assets (e.g., stocks, real estate, etc.). Wealthy individuals benefited the most from the stimulus. Circa 2011-2013, second home buyers and foreign investors fueled the rebirth of real estate. I was one of them. I picked up a mixed-use property via short sale for roughly 40% less than the current asking price for a comparable mixed-use home.
Whereas investors like myself ignited the buying spree between 2011 and 2013, today’s housing market depends more upon mortgage-dependent, owner-occupants. In fact, RealtyTrac recently revealed that all-cash home sales fell to the lowest level since well-to-do buyers were scooping up bargains in 2008. Meanwhile, low-down payment FHA loans are climbing rapidly, as stagnant personal income is unable to keep up with extraordinary home price appreciation. Even those middle-class folks who want to get in the front door with a low-down FHA-backed loan are hesitant. How can you tell? Home-ownership rates have not been this low since 1967.
So where’s the post-recession recovery in home-ownership? It does not exist. Wealthy individuals (myself included), residential real estate trusts and foreign buyers have priced out middle-class families and first-time homebuyers from participation. It follows that with rents skyrocketing and debt-to-income ratios hindering prospective first-timers, existing home sales remain a fraction of what they were a decade earlier. (And that’s with a nearly complete recovery in median home price.)
Is housing doing well, then? Or are housing prices doing well? I submit the latter. In fact, the unanticipated drop (-1.4%) in the most recent data on pending home sales is already being attributed to prices getting beyond the reach of today’s prospective purchasers.
For some, the distinction does not make a difference. For me, it is no different than asking whether corporations are performing well or are their share prices near all-time highs. Indeed, corporations are likely to finish out calendar year 2015 with four full quarters of year-over-year declines in sales. One full year of deterioration in revenue? That’s the stuff of recessionary data.
Again, then, is housing doing well or are housing prices near all-time peaks? Are corporations doing well at selling their products and services or have those companies simply benefited from reflated share prices?
“Okay, Gary, I get your point on stocks and real estate as they pertain to the economy,” you say. “But don’t try to tell me that unemployment hitting 5.1% is a bad sign.” No, I won’t tell you that it is a bad sign. I will tell you that headline U-3 unemployment is a misleading indicator of employment well-being in our country.
For those economists/analysts who choose not to live on “Planet Delusional,” the first metric to look at is the U-6 rate. The Bureau of Labor Statistics (BLS) describes U-3 as the total number of unemployed as a percentage of the . In contrast, the broader U-6 measure is U-3 plus (i.e., those who have indicated that they want a job and have looked for work in the past 12 months), plus those who are marginally attached to the and those who are looking for full-time work but needed to settle on a part-time job.