Has Stimulus Distorted Housing Bottom?

Two and a half years ago, I did an article on Seeking Alpha using the work of economists Carmen Reinhart and Kenneth Rogoff who have done several studies predicting how our current housing crisis will play out.

Their study predicted a return to 2003 housing price levels based on modeling the top 5 global banking crisis recessions.

This week the Case-Shiller home price data for June 2011 showed a year-over-year decline of  4.5% but it was being compared against stimulus effected data.

The June 2011 index is 104.2 (Case-Shiller reindexed to Jan 2003 = 100).  According to the study, the home value collapse was modeled to be over by this year.  But here is one case that a stimulus may have screwed up our ability to understand what is going on.

Econintersect has reported that a Federal Reserve Cash-for-Clunkers Study found that stimulus was ineffective where inventories are involved.  The study specifically included a conclusion that the First Time Homebuyer Credit was ineffective:

These findings suggest an additional caveat regarding many stimulus programs designed to give a temporary boost to spending (the recent First Time Homebuyer Credit is another example): Spending is not the same thing as output when inventories are involved; even if the desired increase in expenditures occurs, inventory reductions may undercut the broader impact on GDP.

In the case of housing, the stimulus screwed up the data.  Is the housing price crisis behind us? – unlikely, but it is closer to the end than the beginning.  But it just makes you mad when money is wasted on an ineffective stimulus – and it clouds your ability to trend the data.

This post was written before the release of the August 2011 BLS Jobs report.  I have written in the past weeks about recession markers – and a zero jobs growth is definitely a recession marker.  This week my colleague Doug Short penned a telling piece on the current economic situation and concluded:

Since the beginning of quarterly GDP data, which has been tracked since 1947, the U.S. has never had an official recession without having achieved new highs in Real GDP and nonfarm employment. Let’s hope that record continues. But ultimately the debate over recession boundaries is a minor quibble in the ongoing economic reality of The Second Great Contraction.

The reality is that the 2007 Great Recession never ended, and was wallpapered with stimulus that covered up the still unresolved economic issues.  To even think this is a double dip or new recession is ridiculous – the economy remains trapped in the Great Depression 2.0.

Economic News this Week:

The Econintersect economic forecast for September 2011 forecast the economy will contract – but there is an indication that the economy may begin slight growth in the coming months. The the majority of the weighted elements were negative, but some key elements were showing positive growth.

This week the Weekly Leading Index (WLI) from ECRI slipped further into negative territory – from -2.1% to -4.3%.  In theory, a negative number implies the economy six months from today will be worse. This index has been eroding and has been in a four month overall downtrend. This index’s value of between 1.6% and 2.1% since the end of June 2011 held until August when this new downward trend began.

This week, ECRI’s has been making the rounds explaining what is going on in his index and the economy.

Initial unemployment claims fell 12,000 (from an upwardly revised 421,000) to 409,000. Historically, claims exceeding 400,000 per week usually occurs when employment gains are less than the workforce growth, resulting in an increasing unemployment rate.  The real gauge – the 4 week moving average – rose 1,750 to 410,250 because of the backward revision. Because of the noise (week-to-week movements), the 4-week average remains the reliable gauge.

The data released this week confirms the economic soft spot is continuing. If current trend lines remain, price inflation will begin to moderate over the next few months.

Weekly Economic Release Scorecard:

Item Headline Analysis
Economic Review

Macrotides details why real USA economic expansion may be years away
August Jobs
No Jobs
Data is bad, and arguably recessionary.  However, there are methodology issues and a Verizon strike in the data
August ISM Manufacturing
Down Slightly
Still positive growth BUT ISM says manufacturing employment expanded in August – Not
2Q2011 Productivity
This downward revision is not a positive sign
July Construction Spending
The data was really flat using current dollars.  Construction is still falling if you use chained dollars.
Double Dip Recession

Doug Short documents the current realities
July Manufacturing
Up 2.4%
One sign the economy is expanding – but manufacturing is only 20% of business
August ADP Jobs
Up 91K
Really, 91K is terrible – but when you are looking for recession signs it is better than a negative number
Double Dip Recession

Rick Davis says the data show that a second dip has already occurred
September Economic Forecast

Econintersect forecasts the economy will contract in September – but the floor may be building
August Conference Board Consumer Confidence
This index has never recovered from the Great Recession – and now it is at Great Recession levels
June Case-Shiller
Up 0.4%
The Summer buying season is ending at levels 4.5% lower than last year
Congressional Debt Reduction Commission

Elliott Morss lays out the headwinds for a compromise solution to the USA debt
July Pending Home Sales
Higher YoY
Econintersect uses pending home sales to forecast existing home sales – and the possibilities for August are interesting
July Personal Consumption Expenditures
Up 0.5%
One of the highest growth rates since the end of the Great Recession

Doug Short shows current GDP level has preceded past recessions
Obama Stimulus

The USA economy would be negative for the last two quarters without the stimulus
Gauging Economic Activity

Martin Hutchinson trashes GDP claiming a better economic activity measure would be gross private product
Gut Feelings vs Data

Rick Davis looks at elements at play which logically have an economic impact with no ability to substantiate
2Q2011 GDP

Rick Davis looks at the BEA numbers and history of after-the-fact downward revisions
Winston Churchill

Frank Li postulates what Churchill would be saying today based on his famous quotes
Germany & the Eurozone

Marshall Auerbach suggests there are really three Germanys – only two of them are pro-Euro
Oil and GDP

Andrew Butter looks at oil pricing and predicts another USA GDP collapse
Western Economies

Eduard Fischer paints a gloomy picture of western economies

Michael Pettis predicts a darkening cycle for global trade
Sovereign Currency

Roger Erickson claims our handling of sovereign debt is bizarre
USA Banking

Dan Flemming ties national security issues to the banking system
Muni Bonds

John Lounsbury says doom has not happened to the municipal bond markets – and now they deserve a second look
Volatile Market

David Grandey charts out the volatility saying more will come
August Investment Review

Macrotides reviews this not-so-good month
European Banks

Kieth Fitz-Gerald worries another crisis is on the way
Summary of the Week

Jeff Miller lists the elements which are affecting the market
St Louis Fed Stress Test

Jeff Miller reviews what it is telling us – and if it is warning of economic decline
Dividend Stocks

Bill Barnhart looks at both iffy and good dividend producing stocks

Bankruptcies this Week: Nutrition 21, Solyndra

Failed Banks this Week:

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